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President Donald Trump has scrapped the tax plan he campaigned on and is going back to the drawing board in a search for Republican consensus behind legislation to overhaul the U.S. tax system.

The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.

Some view the search for new options as a result of Trump’s refusal to set clear parameters for his plan and his exceedingly challenging endgame: reducing tax rates enough to spur faster growth without blowing up the budget deficit.

Administration officials say it’s now unlikely that a tax overhaul will meet the August deadline set by Treasury Secretary Steve Mnuchin.

Off plan: Donald Trump is abandoning the tax overhaul he campaigned on

Tough deadline: Steven Mnuchin, the Treasury Secretary who was at the table when Trump was briefed on the Syria missile strikes, had set an the August deadline for tax reform

But the ambitious pace to figure out a plan reflects Trump’s haste to move quickly past a bruising failure to broker a compromise within his own party on how to replace the health insurance law enacted under President Barack Obama.

The White House is trying to learn the lessons from health care. Rather than accepting a bill written by the lawmakers, White House officials are taking a more active role.

Administration officials have signaled that they want to pass tax legislation with only Republican votes, yet they’ve also held listening sessions with House Democrats.

White House aides say the goal is to cut tax rates sharply enough to improve the economic picture in depressed rural and industrial pockets of the country where many Trump voters live.

But the administration so far has swatted down alternative ways for raising revenues, such as a carbon tax, to offset lower rates.

Trump, who brands himself as a deal-maker, has not said which trade-offs he might accept and he has remained noncommittal on the leading blueprint, from Rep. Kevin Brady, chairman of the Ways and Means Committee.

Brady, a Republican from Texas, has proposed a border adjustment system, which would eliminate corporate deductions on imports, to raise $1 trillion over 10 years that could fund lower corporate tax rates.

But that possibility has rankled retailers who say it would lead to higher prices and threaten millions of jobs, while some lawmakers have worried that the system would violate World Trade Organization rules.

Brady has said he intends to amend the blueprint but has not spelled out how he would do so.

Other options are being shopped on Capitol Hill.

One circulating this past week would change the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security.

The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses.

This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.

Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place.

This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay, a possible win that lawmakers could highlight back in their districts even though it would involve changing the funding mechanism for Social Security, according to the lobbyist, who asked for anonymity to discuss the proposal without disrupting early negotiations.

Although some billed this as a bipartisan solution, and President Barack Obama did temporarily cut the payroll tax after the Great Recession, others note it probably would run into firm opposition from Democrats who are loathe to be seen as undermining Social Security.

The White House would not comment on the plan, but said a value-added tax based on consumption is not under consideration ‘as of now,’ according to a White House statement.

The lack of detail about how to significantly rewrite tax laws for the first time in 30 years may provide Trump some time to build consensus among Republicans. But without Trump laying down his hand, lawmakers appear reluctant to back a plan that will likely stir controversy.

How will markets react? Stocks rallied after the election on the promise of lower taxes and fewer regulations, but the Dow has dipped 1.2 percent over the past month

Stock markets take a hit after Trump’s healthcare defeat

‘Because there are trade-offs, congressmen need cover from the president to withstand the lobbyists and constituents who are going to complain,’ said Bill Gale, an economist at the Brookings Institution who worked at the White House Council of Economic Advisers during President George H.W. Bush’s administration.

The Trump administration appears to have shut out the economists who helped assemble one of his campaign’s tax overhaul plans, which independent analyses show would have increased the budget deficit.

‘It’s a little frustrating that they feel they have to write a new tax plan when they have a tax plan,’ said Steven Moore, an economist at the conservative Heritage Foundation who helped formulate tax policy for the Trump campaign.

Rob Portman, the Republican senator from Ohio, a member of the Senate Finance Committee, said that all of the trial balloons surfacing in public don’t represent the work that’s being done behind the scenes.

‘It’s not really what’s going on,’ Portman said. ‘What’s going on is they’re working with on various ideas.’

Investors are beginning to show some doubts that Trump can deliver. Stocks rallied after his election on the promise of lower taxes and fewer regulations, but the Dow Jones Industrial Average has dipped 1.2 percent over the past month as the path for health care and tax revisions has become muddied.

‘The White House is going to need its own clear direction, or it’s going to need to defer to Congress, but saying that your plan is forthcoming and then not producing a plan kind of puts everything in stasis,’ said Alan Cole, an economist at the conservative Tax Foundation.

Trump isn’t always right when he makes off-the-cuff remarks such as that, but this time he was. The proposed border adjustment tax is so complicated that even its advocates can’t agree on how its disruptive effects on the U.S. economy will play out, and there’s nothing to love about that. The BAT is a bad idea, and it should be scrapped. And while taking it off the table will bring more red ink to the federal budget, there are better ways to stanch the bleeding than subjecting the economy to the trauma of a BAT.

Despite protestations to the contrary, the border adjustment levy is a tax hike embedded in the program of tax reductions that House Republicans put forward last June under the rubric of “A Better Way.” It’s there, presumably, to help offset the effect of the administration’s planned cuts, since the Republicans’ stated aim is to keep those cuts revenue-neutral. Barron’s fully supports the goal of not adding to deficits that, before too long, will be running above $1 trillion a year, given repeated warnings from the nonpartisan Congressional Budget Office about the risk of a financial crisis, due to exploding debt.

The attraction of a BAT is that it could generate an estimated $100 billion a year in revenue. There may be reasons to challenge that estimate, but we’ll accept it for now. There are, however, better ways to slash the fiscal deficit by $100 billion a year than the Better Way plan, and most fall under the heading of spending cuts.

President Trump has spoken about “waste, fraud, and abuse” in “every agency” of the federal government. Indeed, he promised that “we will cut so much, your head will spin.” He should therefore find plenty to love in our proposed reductions in spending. Just for starters, if all corporate welfare were cut from the budget, as much as $100 billion a year could be saved, about matching the total expected from the BAT.

The president also favors slashing the top rate on corporate income to 15% from 35%. Barron’s has proposed a more modest cut, to 22% (“Cut the Top U.S. Corporate Tax Rate to 22%,” Nov. 26, 2016). The Republican package calls for a reduction to 20%, which is close enough to our original proposal and which we believe should boost revenue rather than shrink it.

A list of potential cuts and revenue enhancements, totaling $200 billion, is in the table at the bottom of this page.

THE BETTER WAY PLAN, as noted, would reduce the top federal tax rate on corporate profits to 20% from 35%—which is all to the good. The proposed tax cut would not only be revenue-neutral; it would probably be revenue-enhancing.

In a study released this month by the London-based Centre for Policy Studies, analyst Daniel Mahoney traces the effect on revenue from Britain’s cuts in the corporate tax rate over a 34-year period. According to his calculations, the take from the corporate tax has added three-tenths of a percentage point annually to gross domestic product since rates were slashed.

Similarly, last year, in calling for a maximum U.S. rate of 22%, we traced the significant decline in the average top rate on corporate income for 19 countries in the Organization for Economic Cooperation and Development, which includes the U.S. and the United Kingdom. Over 33 years, their average tax take as a share of GDP rose six-tenths of a percentage point.

While that might not sound like much, every tenth of a percentage point of U.S. nominal GDP is worth $18.9 billion. So if revenue from the corporate tax rises by, say, three-tenths of a percentage point, to 2.5%—a conservative guess—that increase would translate into a bonus of nearly $57 billion a year in revenue. That alone gets us more than halfway to the $100 billion value of a BAT.

The idea of a revenue-enhancing cut in the corporate income tax was put forward in 1978, when economist Arthur Laffer was first cited as arguing that some rate decreases could generate enough added economic growth that the government wouldn’t lose revenue over the long run—and might, in fact, even gain revenue. Laffer also noted that most tax hikes generate less revenue than a conventional “static” analysis indicates, and that most tax cuts lose less.

Laffer’s “dynamic” analysis covered all of the behavioral changes likely to result from a cut. To begin with, if the tax collector claims a lower share of income, there is an incentive to produce more income. Second, a lower rate means there’s less incentive to spend time and effort avoiding the tax.

Corporations don’t pay taxes; only people do. And there is a tendency to forget that if a corporation nets more profits as a result of a lower tax, those funds will soon take the form of salaries, dividends, and capital gains, and will be taxed in those forms.

The second factor, less tax avoidance, applies with special force to a rollback of corporate taxes. As we noted last year, bringing down the top rate to 22% from 35% would dramatically reduce corporate flight to low-tax jurisdictions in the rest of the world.

More From Barron’s

Following the publication of our article, the CBO released a study confirming that U.S corporate tax rates are among the highest in the world. Among the Group of 20 countries—including Japan, China, Russia, Germany, France, Canada, and the U.K.—the U.S. is No. 1, 3, and 4, respectively, in “top statutory corporate tax rate,” “average corporate tax rate,” and “effective corporate tax rate.” The Better Way plan would narrow this gap significantly and make the U.S. more competitive.

But when it comes to the Better Way plan for cutting tax rates on personal income, Barron’s believes that there would be a loss of revenue even after taking into account behavioral changes. The revenue reduction from the proposed personal income-tax cuts has been estimated, on a static basis, at an average of $98 billion a year. We can assume that dynamic losses would run 10% less, or $88 billion, mainly because lower taxes are likely to encourage people to work.

Still, $88 billion a year is a huge loss of revenue. Barron’s proposes that the Better Way plan consider splitting the difference and going halfway on the tax cut, thus saving $44 billion.

THE REVENUE-ENHANCING corporate tax cut would include a special kicker in the form of the border adjustment tax. The BAT would deny corporations the ability to deduct the cost of imports from their taxable income, while all income earned from exports would be exempt from the 20% levy.

This means that companies selling imported goods in the domestic market would be taxed on the sale’s full proceeds—not just on the profit earned—which could more than offset the gains from the corporate tax reduction. At the same time, as noted, there would be no tax on the sale of exports.

The GOP’s Big Three Key players in the border adjustment tax debate: Senate Majority Leader Mitch McConnell, above, and House Speaker Paul Ryan and President Donald Trump, below. McConnell has said that he hasn’t made up his mind about the levy. Alex Wong/Getty Images

The BAT would bring uncertainty and disruption to the U.S. economy, making it hard to predict whether it really would raise $100 billion annually in revenue. The basic idea is that, because the U.S. imports more than it exports, the export exemption would be more than offset by hitting imports hard. Regardless of how it shakes out, the value of the transactions affected by the BAT is huge.

The U.S. trade deficit—the difference between exports and imports—ran at just 3.4% of real GDP in 2016, much lower than the 5.5% peak of 2005. But the actual gross flows of exports and imports are much larger than the difference between the two flows. Exports last year were valued at $2.2 trillion, or 12.8% of real GDP, and imports at $2.7 trillion, or 16.2% (see chart). Given those magnitudes, the tax plan is likely to require massive readjustments throughout the economy.

That’s why major importers, like Wal-Mart Stores, are objecting—and why exporters are clearly pleased. As you might expect, then, the BAT is pitting exporters against importers, creating needless discord at a time when the country is surely suffering from more discord than it can handle.

THE POSITION PAPER for the Better Way asserts that by “exempting exports and taxing imports,” the BAT does “not” consist of the “addition of a new tax.” But of course, the BAT’s designers know that imports normally exceed exports by about $500 billion a year. Apply a back-of-the-envelope 20% to that $500 billion, and you get the hoped-for $100 billion in revenue. So the maneuver of “exempting exports and taxing imports” certainly looks and sounds like a new tax.

The Better Way statement also argues that there is an imbalance in the tax treatment of imports and exports that the BAT must remedy. “In the absence of border adjustments,” it states, “exports from the United States implicitly bear the cost of the U.S. income tax, while imports do not bear any federal income tax cost. This amounts to a self-imposed unilateral penalty on American exports and a self-imposed unilateral subsidy for U.S. imports.”

Ryan strongly supports the tax. Chip Somodevilla/Getty Images

But all other countries impose this “implicit cost” on exports through their own corporate income tax. And since the Better Way would slash America’s top rate to 20%, this implicit cost would finally become competitive with that of other nations.

Some supporters of the BAT like it precisely because it would help exports and penalize imports. The mercantilist view of economics implicit in that aim was discredited in Adam Smith’s 1776 treatise, The Wealth of Nations. And apart from the massive dislocations that will occur if imports shrink, this calls into question whether the projected $100 billion a year in revenue is realistic. As Alan Greenspan once wisely said, “Whatever you tax, you get less of.”

Then again, whether we really will get fewer imports depends a lot on the exchange value of the dollar. Other supporters of the BAT predict that the dollar will respond by appreciating against other currencies, conforming to the dictates of textbook fundamentals. If the dollar appreciates enough, the advantage to exporters and disadvantage to importers will be nullified. Without getting into the technicalities of how all this would work, we concede that it is all quite possible.

But as currency analysts and traders can tell you, exchange rates are subject to all kinds of forces and can spend long periods flouting textbook fundamentals. So whether the dollar will really strengthen in response to the BAT is anyone’s guess. But even if it does, a much stronger greenback would bring other disruptions. American investors with holdings denominated in foreign currencies would take a huge hit. And America’s tourist industries, which are already hurting from what the Los Angeles Times has called a “Trump slump,” would be hurt even more, as the cost of traveling to the States jumps.

There are other questions. Would the World Trade Organization challenge the BAT? Might our trading partners respond in ways that would be unfavorable to us? The border adjustment tax is an experiment in Rube Goldberg economics that the U.S. can do without.

SINCE REVENUE NEUTRALITY is the goal of the Better Way package, what about making up for the $100 billion a year in revenue that the border adjustment tax is supposed to generate?

Whether this tax really will raise as much as $100 billion depends on how imports and exports respond, which is hard to predict. Also, the reduction in the corporate income tax would probably be revenue-enhancing and could generate more than $50 billion in annual revenue.

The president has declared that “anytime I hear border adjustment, I don’t love it” and has voiced concern that it’s overly complicated. Michael Reynolds/Getty Images

We note that the full title of the House Republican plan is “A Better Way: Our Vision for a Confident America,” which leaves room for a vision that includes cost-cutting, along with tax-cutting.

That discussion revealed much low-hanging fruit. For example, the Medicare system is rife with “improper payments,” which Medicare itself estimates at 11% of its spending in 2016. That’s probably a low estimate, because those who get improperly paid tend to keep these payments hidden. Barron’s calculated that if the improper-payment rate could be halved, it would save more than $400 billion over 10 years.

That would contribute $40 billion a year to the $100 billion shortfall from forgoing the BAT. To that we add $65 billion, and perhaps as much as $100 billion, by eliminating corporate welfare.

The Better Way statement properly criticizes the tax code for being “littered with hundreds of preferences and subsidies that pick winners and losers” and “direct resources to politically favored interests.” Spending on corporate welfare is another form of subsidy that picks winners and losers and directs funds to politically favored interests.

IN A 2012 PAPER, “Corporate Welfare in the Federal Budget,” the Cato Institute identified nearly $100 billion worth of yearly spending on corporate handouts, broadly defined, that could be ended. At Barron’s request, Cato senior fellow Chris Edwards updated the scoring on just 10 of the institute’s 40 categories of corporate welfare and came up with $66 billion in potential cuts.

High on Edwards’ list: farm subsidy programs, which redistribute taxpayer money to relatively rich agribusinesses and landowners. That the farm industry receives subsidies makes about as much sense as channeling funds to the restaurant industry, which could well be riskier than farming, based on its high failure rate. This form of corporate welfare goes back to the Great Depression of the 1930s. But whatever argument might have been made for it then hardly applies today, with the yearly tab currently at $25 billion.

Also on the corporate welfare list: pork-barrel handouts administered by the Department of Housing and Urban Development, totaling $13 billion, which go under the heading of “community development,” and which distribute funds to such recipients as museums, recreational facilities, and parking lots. Whatever one may think about the worthiness of these projects, they are better left to states and localities.

Another $10 billion could be saved by abolishing the Universal Service Fund, through which the Federal Communications Commission subsidizes telecommunications companies, among others. A creation of the Telecommunications Act of 1996, this attempt to pick winners and losers is more unnecessary than ever in this dynamic and competitive industry.

PRESIDENT TRUMP PROMISED to “drain the swamp” of Washington’s special interests. One route toward that admirable goal would be to cut corporate welfare. Trump should repeat his objections to a border adjustment tax that would favor the interests of some businesses over others. He can help make U.S. corporations great again by weaning them off subsidies and reducing their tax burdens.

And there are many other provisions that would reduce penalties on work, saving, investment, and entrepreneurship. No, it’s not quite a flat tax, which is the gold standard of tax reform, but it is a very pro-growth initiative worthy of praise.

That being said, there is a feature of the plan that merits closer inspection. The plan would radically change the structure of business taxation by imposing a 20 percent tax on all imports and providing a special exemption for all export-related income. This approach, known as “border adjustability,” is part of the plan to create a “destination-based cash flow tax” (DBCFT).

When I spoke about the Better Way plan at the Heritage Foundation last month, I highlighted the good features of the plan in the first few minutes of my brief remarks, but raised my concerns about the DBCFT in my final few minutes.

Allow me to elaborate on those comments with five specific worries about the proposal.

Concern #1: Is the DBCFT protectionist?

It certainly sounds protectionist. Here’s how the Financial Timesdescribed the plan.

The border tax adjustment would work by denying US companies their current ability to deduct import costs from their taxable income, meaning companies selling imported products would effectively be taxed on the full value of the sale rather than just the profit. Export revenues, meanwhile, would be excluded from company tax bases, giving net exporters the equivalent of a subsidy that would make them big beneficiaries of the change.

…the DBCFT would impose a flat 20 percent tax only on earnings from sales of output consumed within the United States… It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be. This would be a huge incentive to import less and export more, significant change indeed for an economy deeply dependent on global supply chains.

That certainly sounds protectionist as well. A tax on imports and a special exemption for exports.

But proponents say there’s no protectionism because the tax is neutral if the benchmark is where products are consumed rather than where income is earned. Moreover, they claim exchange rates will adjust to offset the impact of the tax changes. Here’s how Lane explains the issue.

…the greenback would have to rise 25 percent to offset what would be a new 20 percent tax on imported inputs — propelling the U.S. currency to its highest level on record. The international consequences of that are unforeseeable, but unlikely to be totally benign for everyone. Bear in mind that many other countries — China comes to mind — can and will manipulate exchange rates to protect their own short-term interests.

For what it’s worth, I accept the argument that the dollar will rise in value, thus blunting the protectionist impact of border adjustability. It would remain to be seen, though, how quickly or how completely the value of the dollar would change.

Concern #2: Is the DBCFT compliant with WTO obligations?

The United States is part of the World Trade Organization (WTO) and we have ratified various agreements designed to liberalize world trade. This is great for the global economy, but it might not be good news for the Better Way plan because WTO rules only allow border adjustability for indirect taxes like a credit-invoice value-added tax. The DBCFT, by contrast, is a version of a corporate income tax, which is a direct tax.

Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization. That’s because it includes a deduction for wages paid by U.S.-located firms, importers and exporters alike — a break that would obviously not be available to competitors abroad.

Advocates argue that the DBCFT is a consumption-base tax, like a VAT. And since credit-invoice VATs are border adjustable, they assert their plan also should get the same treatment. But the WTO rules say that only “indirect” taxes are eligible for border adjustability. The New York Timesreports that the WTO therefore would almost surely reject the plan.

Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. “W.T.O. lawyers do not take the view that things that look the same economically are acceptable,” Mr. Graetz said.

A story in the Wall Street Journal considers the potential for an adverse ruling from the World Trade Organization.

Even though it’s economically similar to, and probably better than, the value-added taxes (VATs) many other countries use, it may be illegal under World Trade Organization rules. An international clash over taxes is something the world can ill afford when protectionist sentiment is already running high. …The controversy is over whether border adjustability discriminates against trade partners. …the WTO operates not according to economics but trade treaties, which generally treat tax exemptions on exports as illegal unless they are consumption taxes, such as the VAT. …the U.S. has lost similar disputes before. In 1971 it introduced a tax break for exporters that, despite several revamps, the WTO ruled illegal in 2002.

Republicans are going to have to figure out how to make such a huge de facto shift in the U.S. tax treatment of imports compliant with international trade law. In its current iteration, the proposal would allow corporations to deduct the costs of wages paid within this country — a nice reward for hiring Americans and paying them well, which for complex reasons could be construed as a discriminatory subsidy under existing World Trade Organization doctrine.

Concern #3: Is the DBCFT a stepping stone to a VAT?

If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO. At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?

One worrisome option is that they might simply turn the DBCFT into a subtraction-method value-added tax (VAT) by tweaking the law so that employers no longer could deduct expenses for labor compensation. This change would be seen as more likely to get approval from the WTO since credit-invoice VATs are border adjustable.

This possibility is already being discussed. The Wall Street Journal story about the WTO issue points out that there is a relatively simple way of making the DBCFT fit within America’s trade obligations, and that’s to turn it into a value-added tax.

One way to avoid such a confrontation would be to revise the cash flow tax to make it a de facto VAT.

One tax initiative that should be strangled before it sees the light of day is to give a tax rebate to exporters and to impose taxes on imports. …It’s a bad idea. Why do we want to make American consumers pay more for products while subsidizing foreign buyers? It also could put us on the slippery slope to our own VAT.

And that’s not a slope we want to be on. Unless the income tax is fully repealed (sadly not an option), a VAT would be a recipe for turning America into a European-style welfare state.

Alan Auerbach, an academic from California who previously was an adviser for John Kerry and also worked at the Joint Committee on Taxation when Democrats controlled Capitol Hill, is the main advocate of a DBCFT (the New York Timeswrote that he is the “principal intellectual champion” of the idea).

He wrote a paper several years ago for the Center for American Progress, a hard-left group closely associated with Hillary Clinton. Auerbach explicitly argued that this new tax scheme is good because politicians no longer would feel any pressure to lower tax rates.

This…alternative treatment of international transactions that would relieve the international pressure to reduce rates while attracting foreign business activity to the United States. It addresses concerns about the effect of rising international competition for multinational business operations on the sustainability of the current corporate tax system. With rising international capital flows, multinational corporations, and cross-border investment, countries’ tax rates and tax structures are of increasing importance. Indeed, part of the explanation for declining corporate tax rates abroad is competition among countries for business activity. …my proposed reforms…builds on the [Obama] Administration’s approach…and alleviates the pressure to reduce the corporate tax rate.

This is very troubling. Tax competition is a very valuable liberalizing force in the world economy. It partially offsets the public choice pressures on politicians to over-tax and over-spend. If governments no longer had to worry that taxable activity could escape across national borders, they would boost tax rates and engage in more class warfare.

Concern #5: Does the DBCFT create needless conflict and division among supporters of tax reform?

As I pointed out in my remarks at the Heritage Foundation, there’s normally near-unanimous support from the business community for pro-growth tax reforms.

That’s not the case with the DBCFT.

The Washington Examiner reports on the divisions in the business community.

Major retailers are skeptical of the House Republican plan to revamp the tax code, fearing that the GOP call to border-adjust corporate taxes could harm them even if they win a significant cut to their tax rate. As a result, retailers, oil refiners and other industries that import goods to sell in the U.S. could provide a major obstacle to the Republican effort to reform taxes. …The effect of the border adjustment, retailers fear, would be that the goods they import to sell to consumers would face a 20 percent mark-up, one that would force retailers like Walmart, the Home Depot and Sears…to raise prices and lose customers.

…retailers are nervous. Very nervous. …About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers’ merchandise. …If the GOP plan were adopted as it’s currently laid out, Gap pays 20 percent corporate tax on the $5 profit from the sweater, or $1. Plus, 20 percent tax on the $80 cost it paid for that sweater from the overseas supplier, or $16. That means the tax goes from $1.75 to $17 for that sweater, more than three times the profit on that sweater. Talk about a hit to margins. …Retailers certainly aren’t taking a lot of comfort in the economic theory of dollar appreciation. …the tax reform plan will dilute specialty retailers’ earnings by an average of 132 percent. …Athletic manufacturers could take a 40 percent earnings hit… Gap, Carter’s , Urban Outfitters , Fossil and Under Armour are most at risk under the plan.

And here’s another article from the Washington Examiner that explains why folks in the energy industry are concerned.

…the border adjustment would raise costs for refiners that import oil. In turn, that could raise prices for consumers. The border adjustment would amount to a $10-a-barrel tax on imported crude oil, raising costs for drivers buying gasoline by up to 25 cents a gallon, the energy analyst group PIRA Energy Group warned this week. The report warned of a “potential huge impact across the petroleum industry,” even while noting that the tax reform plan faces many obstacles to passage.

Concern #6: What happens when other nations adopt their versions of a DBCFT?

Advocates of the DBCFT plausibly argue that if the WTO somehow approves their plan, then other nations will almost certainly copy the new American system.

But is also has negative implications for the fight to protect America from a VAT. The main selling point for advocates of the DBCFT is that we need a border-adjustable tax to offset the supposed advantage that other nations have because of border-adjustable VATs (both Paul Krugman and I agree that this is nonsense, but it still manages to be persuasive for some people).

So what happens when other nations turn their corporate income taxes into DBCFTs, which presumably will happen? We’re than back where we started and misguided people will say we need our own VAT to balance out the VATs in other nations.

The bottom line is that a DBCFT is not the answer to America’s wretched business tax system. There are simply too many risks associated with this proposal. I’ll elaborate tomorrow in Part II and also explain some good ways of pursuing tax reform without a DBCFT.

After months of insisting that a trillion-dollar Border Adjustment Tax (BAT) on American consumers is the best and only way to achieve pro-growth tax reform without adding to the deficit, Ways and Means Chairman Kevin Brady acknowledged that importers fearful of the new tax have “valid concerns.”

The proposed BAT from House Republicans would mean a new 20 percent tax on everything imported into the U.S., raising up to $1.2 trillion of new government revenue in the form of higher prices, shouldered by consumers. In effect, the regressive tax could undercut positive economic outcomes from lower rates and a simplified tax code through tax reform.

According to Chairman Brady, House Republicans need to “make sure that we allay the valid concerns of those that are importing today,” CNBC reports.

Freedom Partners Vice President of Policy Nathan Nascimento issued the following statement:

“Some of the ‘valid concerns’ that Chairman Brady acknowledges include a devastating new trillion-dollar tax hike, higher costs on everyday goods, fewer jobs, and less economic opportunity. We hope to work with the administration and Congress to get pro-growth tax reform done, but a 20 percent tax hike on all imports would only undermine the point of tax reform – which is to provide much-needed relief for taxpayers and the economy. A massive tax hike on all imports is bad policy, and Americans deserve a better plan that can unite lawmakers in both the House and Senate behind comprehensive tax reform.”

Americans for Prosperity has already identified more than $2 trillion in wasteful spending, unnecessary programs, and corporate welfare that ought to be eliminated before any new tax on U.S. consumers. Freedom Partners and its coalition allies support the efforts of Congress and the administration to bring comprehensive tax reform to reality in a way that protects all Americans from a massive tax hike.

U.S. Businesses Facing Massive Tax Increases Under A Border-Adjusted Tax System Have “Valid Concerns”

Wall Street Journal: “Some Retailers And Other Big Importers … Warn Of Tax Bills That Would Exceed Profits, Forcing Them To Pass Costs To Consumers. ”Cody Lusk, president of the American International Automobile Dealers Association, says his members are shocked that a Republican Congress is proposing a 20% tax on imports.” (Richard Rubin, “GOP Plan To Overhaul Tax Code Gets Held Up At The Border,” Wall Street Journal, 2/7/17)

LUSK: “We view this as a very, very serious potential blow to the auto sector and the economy.” (Richard Rubin, “GOP Plan To Overhaul Tax Code Gets Held Up At The Border,” Wall Street Journal, 2/7/17)

Financial Times: Border Tax Threatens To Devastate Importers Through Soaring Tax Bills. “Yet for Mr. Woldenberg the hope has turned to horror. Republicans are still promising the most sweeping changes since the Reagan reforms of 1986. But the only firm proposal on the table — from the House of Representatives — threatens to devastate his 150-person business because it includes a 20 per cent tax on imports … The problem for Mr. Woldenberg is that his goods come from China — 98 per cent of the products he sells in the US are imported. US factories could not produce them with the same low costs and specialized skills, he says. So he would have no choice but to pay the import levy. He estimates it would send his tax bill soaring to 165 per cent of earnings.” (Barney Jopson, Sam Fleming & Shawn Donnan, “Trump And The Tax Plan Threatening To Split Corporate America,” Financial Times, 2/13/17)

RICK WOLDENBERG: “To preserve cash flow I [would have to] raise my prices by a third, expect volume to go down by 40 per cent, and fire one out of five people.” (Barney Jopson, Sam Fleming & Shawn Donnan, “Trump And The Tax Plan Threatening To Split Corporate America,” Financial Times, 2/13/17)

RBC Capital Markets: Major Retailers Would Face Tax Bills That Exceed Their Operating Profits. “Major retailers like Wal-Mart, Best Buy, Costco and Dollar Tree would face tax bills that exceed their operating profits under House Republicans’ plans to create a ‘border adjustable’ business tax, RBC Capital Markets said. The investment bank sided with retailers in a debate over the proposal, saying in a research note it would have a ‘seriously adverse’ impact on them. ‘If the US moves to a border-adjusted tax system, most of our retailers would be forced to raise prices (and revenues) or meaningfully change their import/domestic sourcing mix, or their earnings would be materially reduced,’ it said.” (Brian Faler, “RBC Capital Markets: GOP Border-Adjustment Plan Bad For Retailers,” POLITICO Pro, 12/12/16)

POLITICO: “Retailers Fear Massive Tax Increases Under House Republican Tax Plan” “Many retailers fear that, even with Republicans promising to slash the corporate tax rate, they will still face big tax increases that in some cases will exceed their profits. On high alert over the proposal, retailers have begun a big lobbying campaign on the Hill, warning lawmakers and their aides that any tax hikes will get passed on to their constituents in the form of higher prices.” (Brian Faler, “Retailers Fear Massive Tax Increases Under House Republican Tax Plan,” POLITICO, 11/23/16)

The National Retail Federation Warns That A Border Tax Could Shut Businesses Down Completely. “‘Our members have told us that the import tax could be as high as five times their profits,’ said David French, chief lobbyist for the National Retail Federation. ‘I don’t know how viable some retailers would be in the face of this import tax.’” (Brian Faler, “Retailers Fear Massive Tax Increases Under House Republican Tax Plan,” POLITICO, 11/23/16)

POLITICO Pro: “Some Of The Biggest Losers Would Be Retailers Like Walmart, Best Buy And Home Depot That Import Massive Amounts Of Goods And Materials On Which They Would Suddenly Have To Pay Taxes.” “The border adjustment plan would affect individual companies differently, depending in part on how much they import and export. Some of the biggest losers would be retailers like Walmart, Best Buy and Home Depot that import massive amounts of goods and materials on which they would suddenly have to pay taxes.” (Brian Faler, “Some Companies May Never Pay Taxes Under Border-Adjustment Tax Plan,” POLITICO Pro, 1/9/17)

Axios: Cowen Research Released A Study Highlighting Some Of The Big Name Companies That Will Be Hurt By The Border Adjustments High Tax Hikes. “Cowen Research published a report Thursday that estimates the effect of the reform plan, and other planned measures, like eliminating the deductibility of interest and a headline corporate tax cut, on different industries and companies. Here are some of the big-name firms Cowen says will be hurt by reform: 1. Apple: The world’s largest company would see its tax bill jump because it won’t be able to deduct the expense of assembly abroad. 2. Constellation Brands: The largest beer importer in America will not be able to expense the cost of goods it brings across the border, like its Corona brand. 3. Gap: Between 50% and 80% of the retailer’s cost of the goods its sells comes from abroad. Walmart: 4. Walmart’s low margins means that it may not be able to survive a tax hike on imported goods without raising prices. 5. Target: Will suffer from the same conundrum as Walmart, but will be worse off since less of its revenue comes from domestically-sourced groceries. J.C. Penney: The department store has high debt loads, and interest on debt will not be deductible under the Republican plan. (Christopher Matthews, “These Companies Will Be Hit Hardest By GOP Tax Reform,” Axios, 1/27/17)

Border Adjustment Tax Would Result In Higher Costs For Hard-Working Families

Christian Science Monitor: Border Tax Could Raise Car Prices By Thousands Of Dollars. “Michigan-based Baum & Associates says that a border tax–one that applies not only to vehicles imported from factories abroad but also to foreign-made vehicle parts–could increase sticker prices by as much as $17,000 … Most increases would be smaller, but still very substantial. Volvo, for example, would need to up its prices by more than $7,500 to accommodate a border tax. Volkswagen wouldn’t be far behind, with increases of around $6,800. Even Detroit brands would see price upticks: Ford’s would climb $285, and General Motors’ would rise by nearly $1,000. Fiat Chrysler would have to boost prices by closer to $2,000.” (Richard Read, “How Trump’s Border Tax Could Raise Car Prices By Thousands Of Dollars,” Christian Science Monitor, 2/8/17)

Auto Sales Would Plummet Under A Border Adjustment Tax. “A report from UBS Securities says that the higher car prices would slash U.S. auto sales by about 2 million vehicles per year. That would more than erase the increased capacity and almost certainly result in layoffs.” (Richard Read, “How Trump’s Border Tax Could Raise Car Prices By Thousands Of Dollars,” Christian Science Monitor, 2/8/17)

More Than A Hundred American Businesses Are Opposing The Republican Border Tax: “Don’t Make Hard-Working Families Pay More On Essential Products.” “Nike, Rite Aid, The Gap, Best Buy and Abercrombie & Fitch have joined a new advocacy group aimed at killing House Republicans’ plans to create a border adjustable business tax. They are some of the more than 100 companies and trade associations behind Americans for Affordable Products, an organization launched today that is pushing lawmakers to dump a plan to begin taxing imports as part of a broader tax-code rewrite. The groups, which rely on imports, fear the House Republican plan will mean huge tax increase even as Republicans promise to simultaneously slash the corporate tax rate … Other well-known companies joining the effort include Target, Walmart, QVC, Petco, AutoZone, Macy’s and Levi Strauss.” (Brian Faler, “Border Adjustment Tax Opponents Launch New Group Targeting GOP Proposal,” Politico, 2/01/17)

“A Sweeping Tax Reform Proposal Meant To Boost U.S. Manufacturing Faces Mounting Pressure From Industries That Rely Heavily On Imported Goods …” “A sweeping tax reform proposal meant to boost U.S. manufacturing faces mounting pressure from industries that rely heavily on imported goods as President-elect Donald Trump and congressional Republicans work to finalize new tax legislation. As Republican members of the House of Representatives tax committee prepared to discuss tax reform this week, the panel received a letter from 81 industry groups rejecting the proposal known as ‘border adjustability.’ A lynchpin of the House Republican ‘Better Way’ agenda and viewed favorably by Trump’s team, the policy would help manufacturers by exempting export revenues from corporate taxes. But it would tax imports, hitting import-dependent industries.” (David Morgan, “U.S. Tax Reform Proposal On Border Trade Faces Growing Opposition,” Reuters, 12/15/16)

CNBC: Coach CEO Victor Luis Acknowledged That “Any Border Tax Will Lead To Higher Prices For The Consumer.” “If we see this border adjustment in an economy where 70 percent of GDP is driven by consumption that is driven on imports, any border tax will lead to higher prices for the consumer … That’s just a reality that we’ll have to face if it comes to that.” (Rachel Cao, “Coach CEO: Any Border Tax Will Lead To Higher Prices For The Consumer,” CNBC, 1/31/17)

National Retail Federation: The Border Adjustment Tax Could Cost The Average Family $1,700 In Just The First Year. “The imposition of a ‘border adjustment tax,’ a key provision of a pending House tax reform proposal, would end up seriously harming U.S. consumers. NRF analysis indicates that this plan could cost the average family $1,700 in the first year alone if the border adjustment provision is enacted. While economic theory suggests that trade flow of imports and exports would balance out over the long run due to offsetting exchange rate and price adjustments, there is no consensus as to the degree or the timing of these adjustments. In the near term, consumers would be left to pick up the significant tab while hoping that the economic theory proves out.” (Mark Mathews, “Border Adjustment Tax Would Cost American Households Up To $1,700 In First Year Alone,” National Retail Federation, 2/3/17)

NRF: Annual Family’s Savings Could Be Wiped Out By Nearly A Third. “For the average family, 27 percent of their savings (income after taxes and expenditures) could evaporate with the cost increases caused by the border tax.” (Mark Mathews, “Border Adjustment Tax Would Cost American Households Up To $1,700 In First Year Alone,” National Retail Federation, 2/3/17)

“Unmarried adults without children currently have only $443 left over annually after taxes and expenditures. If the border adjustment tax were enacted, they could see an $836 increase in costs — nearly 200 percent higher than their annual savings.”

“One-parent households, which are already in the red, could see an additional $1,000 added to their debt burden as they do what they can to make ends meet. Their apparel and footwear bills would increase by $271”

“The average family (married with children) could see their apparel costs (including shoes) increase by $437 a year.”

“Single people could see their annual gasoline bills rise by $189, a whopping 43 percent of their annual average savings.”

“Married couples with children could see their annual gasoline bill could increase by over $400.”

CNBC: “The Republicans’ Plan To Enact A Border Adjustment Tax Will Leave Consumers Digging Deeper Into Their Pockets,” Increasing The Price Of Everyday Goods Like Clothes And Shoes By 20 Percent. “It will force consumers to pay as much as 20 percent more for the products they need. Gasoline is estimated to go up as much as 35 cents a gallon,’ said ‘Americans for Affordable Products’ advisor Brian Dodge … ‘Common household goods, apparel, things that people count on every day, pajamas, will cost more and really just so a certain, select group of corporations can avoid paying taxes forever. We think that’s bad policy…” (Michelle Fox, “Consumers Could See 20% Price Hike With Border Adjustment Tax, Retail Group Says,” CNBC, 2//17)

Economists And Analysts Weigh-In Against Border Adjustments

Dan Mitchell, Cato Institute: “I’ve Never Understood Why Politicians Think It’s A Good Idea To Have Higher Taxes On What Americans Consume And Lower Taxes On What Foreigners Consume.” (Dan Mitchell, “A Remarkably Good And Reasonably Bold Tax Reform Plan From House Republicans,” International Liberty, 6/25/16)

President Of The New York Fed Bill Dudley: “… There Could Be A Lot Of Unintended Consequences.” “Another prominent critic of a ‘border adjustment tax’ emerged Tuesday: the president of the New York Federal Reserve. Bill Dudley was asked by Macy’s CEO Terry Lundgren at a meeting of the National Retail Federation trade group what he thinks of the idea of a border adjustment tax, which involves taxing imports at 20 percent, while making U.S. exports tax-free. … ‘I think that it will lead to a lot of changes in the value of the dollar, the price of imported goods in the U.S., and I’m not sure that would all happen very smoothly,’ Dudley said. ‘I also think there could be a lot of unintended consequences.’” (Michelle Caruso-Cabrera, “NY Fed’s Dudley Sees ‘A Lot Of Unintended Consequences’ From Border-Tax Plan,” CNBC, 1/17/17)

Stephen Moore, Heritage Foundation: Border Tax Unlikely To Be Enacted. “A Heritage Foundation economist who advised President Trump’s campaign said he doubts a proposal from House Republicans to tax imports and exempt exports will gain traction.” (Naomi Jagoda, “Trump Campaign Adviser: Border Tax Unlikely To Be Enacted,” The Hill, 2/7/17)

Steve Forbes: Border Adjustment Amounts To “Sneaky, Anti-Consumer Tax.” “This levy will cost American consumers at least a trillion dollars over the next ten years … Prices for everyday items, such as socks, shoes and household appliances, will go up. So will tech devices like the iPad, not to mention automobiles and trucks. Gasoline? Millions of Americans will pay an additional 30 cents or more per gallon at the pump. Lower-income and struggling middle-class Americans will get hit the hardest.” (Steve Forbes, “OMG! House Republicans Are Preparing To Hit Consumers With A Horrible New Tax That Will Harm Trump And Hurt The Economy,” Forbes, 1/11/17)

KUDLOW: “That is an exercise in government planning and complexity that I believe is doomed to fail … I think the whole corporate tax reform, which is the most important pro-growth measure, will go down the drain over this … There’s a problem that exists, but this is not the right solution …” (Brian Faler, “Trump Adviser Larry Kudlow Slams Border-Adjustment Tax Plans,” POLITICO Pro, 1/12/17)

Concerns about the”Border Adjustable” Tax Plan from the House GOP, Part II

I wrote yesterday to praise the Better Way tax plan put forth by House Republicans, but I added a very important caveat: The “destination-based” nature of the revised corporate income tax could be a poison pill for reform.

I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax.

Brian Garst of the Center for Freedom and Prosperity has just authored a new study on the DBCFT. Here’s his summary description of the tax.

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means that it is explicitly designed to preclude tax competition.

Since CF&P was created to protect and promote tax competition, you won’t be surprised to learn that the DBCFT’s anti-tax competition structure is a primary objection to this new tax.

First, the DBCFT is likely to grow government in the long-run due to its weakening of international tax competition and the loss of its disciplinary impact on political behavior. … Tax competition works because assets are mobile. This provides pressure on politicians to keep rates from climbing too high. When the tax base shifts heavily toward immobile economic activity, such competition is dramatically weakened. This is cited as a benefit of the tax by those seeking higher and more progressive rates. …Alan Auerbach, touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and that it would “alter fundamentally the terms of international tax competition.” This raises the obvious question—would those businesses and economists that favor the DBCFT at a 20% rate be so supportive at a higher rate?

Brian also shares my concern that the plan may morph into a VAT if the WTO ultimately decides that is violates trade rules.

Second, the DBCFT almost certainly violates World Trade Organization commitments. …Unfortunately, it is quite possible that lawmakers will try to “fix” the tax by making it into an actual value-added tax rather than something that is merely based on the same anti-tax competition principles as European-style VATs. …the close similarity of the VAT and the DBCFT is worrisome… Before VATs were widely adopted, European nations featured similar levels of government spending as the United States… Feeding at least in part off the easy revenue generate by their VATs, European nations grew much more drastically over the last half century than the United States and now feature higher burdens of government spending. The lack of a VAT-like revenue engine in the U.S. constrained efforts to put the United States on a similar trajectory as European nations.

And if you’re wondering why a VAT would be a bad idea, here’s a chart from Brian’s paper showing how the burden of government spending in Europe increased once that tax was imposed.

In the new report, Brian elaborates on the downsides of a VAT.

If the DBCFT turns into a subtraction-method VAT, its costs would be further hidden from taxpayers. Workers would not easily understand that their employers were paying a big VAT withholding tax (in addition to withholding for income tax). This makes it easier for politicians to raise rates in the future. …Keep in mind that European nations have corporate income tax systems in addition to their onerous VAT regimes.

And he points out that those who support the DBCFT for protectionist reasons will be disappointed at the final outcome.

…if other nations were to follow suit and adopt a destination-based system as proponents suggest, it will mean more taxes on U.S. exports. Due to the resulting decline in competitive downward pressure on tax rates, the long-run result would be higher tax burdens across the board and a worse global economic environment.

Brian concludes with some advice for Republicans.

Lawmakers should always consider what is likely to happen once the other side eventually returns to power, especially when they embark upon politically risky endeavors… In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes. A highly probable outcome is that the United States’ corporate tax environment becomes more like that of Europe, consisting of both consumption and income taxes. The long-run consequences will thus be the opposite of what today’s lawmakers hope to achieve. Instead of a less destructive tax code, the eventual result could be bigger government, higher taxes, and slower economic growth.

Amen.

My concern with the DBCFT is partly based on theoretical objections, but what really motivates me is that I don’t want to accidentally or inadvertently help statists expand the size and scope of government. And that will happen if we undermine tax competition and/or set in motion events that could lead to a value-added tax.

Let’s close with three hopefully helpful observations.

Helpful Reminder #1: Congressional supporters want a destination-based system as a “pay for” to help finance pro-growth tax reforms, but they should keep in mind that leftists want a destination-based system for bad reasons.

Based on dozens of conversations, I think it’s fair to say that the supporters of the Better Way plan don’t have strong feelings for destination-based taxation as an economic principle. Instead, they simply chose that approach because it is projected to generate $1.2 trillion of revenue and they want to use that money to “pay for” the good tax cuts in the overall plan.

That’s a legitimate choice. But they also should keep in mind why other people prefer that approach. Folks on the left want a destination-based tax system because they don’t like tax competition. They understand that tax competition restrains the ability of governments to over-tax and over-spend. Governments in Europe chose destination-based value-added taxes to prevent consumers from being able to buy goods and services where VAT rates are lower. In other words, to neuter tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) sales taxes. Again, their goal is to cripple tax competition.

Something else to keep in mind is that leftist supporters of the DBCFT also presumably see the plan as being a big step toward achieving a value-added tax, which they support as the most effective way of enabling bigger government in the United States.

Helpful Reminder #2: Choosing the right tax base (i.e., taxing income only one time, otherwise known as a consumption-base system) does not require choosing a destination-based approach.

The proponents of the Better Way plan want a “consumption-base” tax. This is a worthy goal. After all, that principle means a system where economic activity is taxed only one time. But that choice is completely independent of the decision whether the tax system should be “origin-based” or “destination-based.”

The bottom line is that you can have the right tax base with either an origin-based system or a destination-based system.

Helpful Reminder #3: The good reforms of the Better Way plan can be achieved without the downside risks of a destination-based tax system.

The Tax Foundation, even in rare instances when I disagree with its conclusions, always does very good work. And they are the go-to place for estimates of how policy changes will affect tax receipts and the economy. Here is a chart with their estimates of the revenue impact of various changes to business taxation in the Better Way plan. As you can see, the switch to a destination-based system (“border adjustment”) pulls in about $1.2 trillion over 10 years. And you can also see all the good reforms (expensing, rate reduction, etc) that are being financed with the various “pay fors” in the plan.

I am constantly asked how the numbers can work if “border adjustment” is removed from the plan. That’s a very fair question.

But there are lots of potential answers, including:

Make a virtue out of necessity by reducing government revenue by $1.2 trillion.

Reduce the growth of government spending to generate offsetting savings.

Reduce the size of the tax cuts in the Better Way plan by $1.2 trillion.

I’m not pretending that any of these options are politically easy. If they were, the drafters of the Better Way plan probably would have picked them already. But I am suggesting that any of those options would be better than adopting a destination-based system for business taxation.

Ultimately, the debate over the DBCFT is about how different people assess political risks. House Republicans advocating the plan want good things, and they obviously think the downside risks in the future are outweighed by the ability to finance a larger level of good tax reforms today. Skeptics appreciate that those proponents want good policy, but we worry about the long-run consequences of changes that may (especially when the left sooner or late regains control) enable bigger government.

P.S. This is not the first time that advocates of good policy have bickered with each other. During the 2016 nomination battle, Rand Paul and Ted Cruz proposed tax reform plans that fixed many of the bad problems in the tax code. But they financed some of those changes by including value-added taxes in their plans. In the short run, either plan would have been much better than the current system. But I was critical because I worried that the inclusion of VATs would eventually give statists a tool to further increase the burden of government.

THE CORNER THE ONE AND ONLY. Speaker Ryan’s Use of Reporters’ Recorders to Explain His Border Tax Was Cute — But Misleading

Faced with growing opposition to their border-adjustment tax, congressional Republicans are nonetheless on the offensive trying to sell it. I have expressed my many reasons for opposing the tax, including my disbelief that Republicans would support a massive tax increase alongside what is otherwise a pro-growth tax reform. While they oppose tax increases to pay for spending increases in other contexts and usually make the case that spending increases should be paid for by spending cuts, Republicans continue to push for this massive new source of revenue, in spite of the distortions it would introduce.

Until now, supporters of the tax have used many questionable arguments. For instance, they claim we shouldn’t worry about the protectionist aspect of a tax that imposes a 20 percent rate to imports but exempts exports under the hope that the U.S. dollar will adjust fully and quickly. However, there are reasons to believe that while the U.S. currency will adjust, it won’t adjust fully (Federal Reserve Board chairwoman Janet Yellen is only the latest one to stress that point), it won’t adjust as quickly as they claim (especially if the tax is challenged under the World Trade Organization as the Europeans have warned is going to be the case), and it won’t result in unicorns and rainbows.

But the latest misguided statements about the border-adjustment tax comes from House speaker Paul Ryan — who ought to know better. During a press conference last week, he repeated the claim that United States was at a disadvantage because other countries’ exports are exempted from taxes while U.S. goods aren’t. [Ryan] noted that most other countries already border-adjust their taxes and tax goods based on whether they were consumed in their jurisdiction.

That comment is bound to confuse reporters because, as Mr. Ryan must know, no other country border-adjusts their corporate income tax. They border-adjust their Value Added Tax. Conflating the two is misleading, to say the least.

Ryan continued:

The Speaker picked up two reporters’ recorders to give an example of how goods are taxed currently. He suggested one was American-made and the other was Japanese-made. Early on, he dropped one of the recorders, saying “oops” and receiving laughter from the reporters. “Here’s what Japan does when they make this tape recorder: When they send it for export they take the tax off of it, and then it comes to America and it’s not taxed, and it comes through to compete against our good, which was taxed. Theirs was untaxed twice,” Ryan said. “When America makes something, like a tape recorder, we tax it, and then we send it to Japan. As it enters Japan it’s taxed again, to compete against their tape recorder,” he continued. “So we are doing it to ourselves. We are hurting our manufacturing and jobs. We are putting a bias against making things in America in the tax code. . . . That is why we think this is very important. This is good manufacturing policy.”

Oh boy, where do I begin? First, it is true that U.S. companies are at a disadvantage but it is not because of other countries’ tax codes. It is because our corporate-income-tax system has the highest rate of all OECD countries and because, unlike most of our competitors, it taxes U.S. companies’ profits no matter where they are earned in the world. The solution to this disadvantage is to reduce the rates and move to a territorial system. Oh, and by the way, unlike what Ryan and other proponents of a border-adjustment tax would like you to believe, you do not need to move to an expansive destination-based-cash-flow tax to have a territorial tax.

Now let me address the cute tape-recorder example used by the speaker. It is totally misleading because it conflates foreign countries corporate tax and VAT taxes and it paints a picture that is incorrect. For instance, he claims that Japanese exports are exempt from taxes. No, Japanese products exported to the U.S. are exempt from the Japanese VAT but the Japanese company is still paying U.S. corporate tax on its U.S. profits. And you know what? In that sense, the Japanese export is treated exactly like the U.S. goods sold in the U.S. In other words, the playing field is even! I repeat: Japanese goods in the U.S. are taxed like U.S. goods in the U.S.

How about U.S. exports in Japan? Well, it gets hit by the Japanese VAT in Japan and by the Japanese corporate tax but so are Japanese goods sold in Japan. Again, the only disadvantage faced by U.S. companies selling tape recorders abroad comes from the U.S. tax system, which requires that income earned in Japan be taxed by Uncle Sam at 35 percent after benefiting from a tax credit for tax paid in Japan. If the U.S. company decides to keep its Japanese income outside the U.S., the U.S. rate won’t apply.

Dan Mitchell explains why the VAT doesn’t change the terms of trade in this video.

Finally, economists have debunked the idea implied by the speaker that foreign VATs give an advantage to foreign exports — and therefor boost foreign exports. It is simply not true. It follows that imposing a border-adjustment tax in the U.S. will not boost U.S. exports either. Period.

Let me summarize this for you:

No, other countries do not border-adjust their corporate income tax.

Comparing other countries’ VATs and our corporate tax is problematic to say the least.

No, foreign exports sold in the U.S. do not have an advantage over U.S. goods sold in the U.S. Foreign VATs do not boost foreign exports.

A border tax in the U.S. will not boost our exports but it will hurt consumers and many U.S. retailers.

The disadvantage faced by U.S. companies exporting goods abroad comes from the terrible worldwide tax and high rates of the U.S. tax regime, not from other countries’ tax system.

The way to fix the U.S. disadvantage is not to create a new expansive tax that would penalize imports in the U.S. — including imports for the benefit of U.S. domestic companies — and would penalize U.S. consumers.

Who’s Afraid of a Big BAT Tax?

The Border Adjustment Tax, a proposal favored by House Speaker Paul Ryan, has aroused serious opposition from Republican senators.

Joshua Roberts / Reuters

MICHELLE COTTLE

FEB 21, 2017

Donald Trump is feeling good about taxes. In his gonzo press conference last Thursday, he assured Americans that “very historic tax reform” is absolutely on track and is going to be—wait for it!—“big league.” The week before, he told a bunch of airline CEOs that “big league” reform was “way head of schedule” and that his people would be announcing something “phenomenal” in “two or three weeks.” And at his Orlando pep rally this past weekend, he gushed about his idea for a punitive 35 percent border tax on products manufactured overseas. The magic is happening, people. And soon America’s tax code will be the best, most beautiful in the world.

But here’s the thing. What Trump doesn’t know about the legislative process could overflow the pool at Mar-a Lago. And when it comes to tax reform, even minor changes make Congress lose its mind. Weird fault lines appear, and the next thing you know, warring factions have painted their faces blue and vowed to die on the blood-soaked battlefield before allowing this marginal rate to change or that loophole to close.

Such drama has, in fact, already begun over the proposal percolating in the House. At issue: a provision known as the border adjustment tax—let’s call it BAT—which, shrunk to its essence, incentivizes domestic manufacturing by slapping a 20 percent levy on imports, while making U.S. companies’ export-revenues tax deductible.

BAT fans—most notably House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady—pitch the provision as an economically elegant twofer: an America-First measure that discourages companies from moving operations overseas while creating a revenue stream ($1 trillion every decade or so) that allows the overall corporate tax rate to be slashed.

Opponents—most vocally Senators David Perdue and Tom Cotton—argue that a BAT is another grubby government cash grab that will ultimately hurt consumers when, say, Walmart has to jack up the prices of underwear, bananas, and Playstations. In a February 8 letter to colleagues, Perdue, who spent four decades in the business world, charged that the BAT is “regressive, hammers consumers, and shuts down economic growth.”Thus the battle lines are drawn. And, make no mistake, this will not be some bush-league, penny-ante skirmish. Behind the legislative factions are amassing some of the heaviest hitters in corporate America, ready to spend millions to sway debate on behalf of their team.Roughly speaking, companies that do a lot of exporting dig the BAT (think: Boeing, Merck, and Dow Chemical) while import-dependent retailers (including Target, Nike, and, yes, Walmart) fear it will destroy their bottom lines. The oil industry isn’t feeling much BAT love either. The Koch brothers want it dead, like, yesterday.At this point, anti-BATers have an edge. Why? Partly, because the provision is super complicated and almost impossible to explain in terms that don’t sound like something a coven of economists vomited up. Ask BAT fans why the provision won’t, in fact, hurt retailers or consumers, and you’re instantly hip-deep in talk of currency revaluation, purchasing power, and territorial taxation. Last Wednesday, one day after Paul Ryan tried to educate Senate Republicans on the wonders of BAT at their weekly policy lunch, Tom Cotton (who represents Walmart’s home state of Arkansas) snarked on the Senate floor, “Some ideas are so stupid only an intellectual could believe them.”

This is in no way to suggest that the pro-BAT arguments are wrong. They simply don’t push the same buttons as anti-BAT warnings that Congress is poised to screw consumers in order to fund big tax cuts for corporations.For the past few weeks, in fact, an anti-BAT coalition called Americans for Affordable Products has been busy hawking this exact message. “This is a consumer tax—a means by which House Republicans are paying for other tax deductions,” asserted AAP member Brian Dodge. “It’s not about America First. It’s not a trade-deficit reduction tool. It is a pay-for.”AAP is lobbying lawmakers and staffers and doing public outreach. Last Wednesday, it dispatched eight CEOs to chat with Trump and Vice President Pence. “We view our job as leading a large education campaign,” said Dodge. “We believe the more that lawmakers understand about this proposal, the less inclined they’ll be to support it.”Of course, BAT fans are gearing up as well and promise to be equally aggressive. The day after the AAP roll out, the American Made Coalition launched, with an eye toward helping Ryan’s office spread the good word. “It takes time to educate both policy makers and businesses on what’s on the table,” said Brian Reardon, an adviser to the group.There is no place for subtlety in this war. Part of BAT supporters’ argument is that, without the provision, tax overhaul will implode altogether. Message: Get on board or kiss your once-in-a-lifetime reform opportunity good-bye.It’s a question of Senate math. To pass with a simple majority (and avoid a filibuster by Democrats), the GOP’s plan must go through under the procedure known as reconciliation. But to qualify for reconciliation, the package–which slashes both corporate and upper-bracket taxes–cannot blow a hole in the long-term budget. Without the $1 trillion in revenues from BAT, say advocates, there’s no way that hole can be plugged.“This is the only way at these rates and keeping things revenue neutral,” insisted a senior Republican aide. There is no other viable option. Period. End of story.But anti-BATers are eyeing a different Senate equation. To amass even a simple majority of votes, the BAT can lose only two of the 52 Republican members. (Unless Democrats cross the aisle, of course.) In addition to Cotton’s and Perdue’s open hostility, Senators John Boozman, Mike Rounds, John Cornyn, Tim Scott, and Mike Lee have all expressed reservations. “I have real concerns that this piece of the House blueprint will cause more disruption than necessary,” Lee said. “Will the dollar suddenly shoot up by 20 percent? Will U.S. manufacturers have to redo their international supply chains? These are all open questions.”

With the provision’s Senate prospects iffy, there’s less incentive for House conservatives to support something that smells even faintly like a tax. Both the current chairman of the Freedom Caucus, Mark Meadows, and the former chairman, Jim Jordan, have said they’d like reform done without a BAT.

“My reasoning is very basic,” Jordan told me. “Why in the world would we want to add another revenue stream?” You can debate the impact on exchange rates and purchasing power all day, said Jordan, but that doesn’t address many conservatives’ core objection. “We come at it from fundamental perspective,” he said. “The idea that you’re going to add an entirely new tax is a big problem.”

(BAT fans, for the record, dispute that this is a new tax. It is, they insist, replacing the existing system with an entirely new, far superior one that must be looked at, as Reardon put it, “holistically.”)

The only thing everyone can agree on is that this will be a long, ugly fight. If Trump drops his tariff idea and embraces BAT, it could boost the cause. But even then, he’d need to do major arm-twisting to get Senate skeptics on board (especially with the likes of Walmart and the Kochs twisting the other arm.) Like it or not, this is what the political big leagues are like: slow, messy, and infuriating.

The up side for Trump: He’ll have time to throw a lot more pep rallies on this topic before anything gets decided.

Summary of the Latest Federal Income Tax Data, 2016 Update

The Internal Revenue Service has recently released new data on individual income taxes for calendar year 2014, showing the number of taxpayers, adjusted gross income, and income tax shares by income percentiles.[1]

The data demonstrates that the U.S. individual income tax continues to be very progressive, borne mainly by the highest income earners.

In 2014, 139.6 million taxpayers reported earning $9.71 trillion in adjusted gross income and paid $1.37 trillion in individual income taxes.

The share of income earned by the top 1 percent of taxpayers rose to 20.6 percent in 2014. Their share of federal individual income taxes also rose, to 39.5 percent.

In 2014, the top 50 percent of all taxpayers paid 97.3 percent of all individual income taxes while the bottom 50 percent paid the remaining 2.7 percent.

The top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).

The top 1 percent of taxpayers paid a 27.1 percent individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).

Reported Income and Taxes Paid Both Increased Significantly in 2014

Taxpayers reported $9.71 trillion in adjusted gross income (AGI) on 139.5 million tax returns in 2014. Total AGI grew by $675 billion from the previous year’s levels. There were 1.2 million more returns filed in 2014 than in 2013, meaning that average AGI rose by $4,252 per return, or 6.5 percent.

Meanwhile, taxpayers paid $1.37 trillion in individual income taxes in 2014, an 11.5 percent increase from taxes paid in the previous year. The average individual income tax rate for all taxpayers rose from 13.64 percent to 14.16 percent. Moreover, the average tax rate increased for all income groups, except for the top 0.1 percent of taxpayers, whose average rate decreased from 27.91 percent to 27.67 percent.

The most likely explanation behind the higher tax rates in 2014 is a phenomenon known as “real bracket creep.” [2] As incomes rise, households are pushed into higher tax brackets, and are subject to higher overall tax rates on their income. On the other hand, the likely reason why the top 0.1 percent of households saw a slightly lower tax rate in 2014 is because a higher portion of their income consisted of long-term capital gains, which are subject to lower tax rates.[3]

The share of income earned by the top 1 percent rose to 20.58 percent of total AGI, up from 19.04 percent in 2013. The share of the income tax burden for the top 1 percent also rose, from 37.80 percent in 2013 to 39.48 percent in 2014.

Top 1%

Top 5%

Top 10%

Top 25%

Top 50%

Bottom 50%

All Taxpayers

Table 1. Summary of Federal Income Tax Data, 2014

Number of Returns

1,395,620

6,978,102

13,956,203

34,890,509

69,781,017

69,781,017

139,562,034

Adjusted Gross Income ($ millions)

$1,997,819

$3,490,867

$4,583,416

$6,690,287

$8,614,544

$1,094,119

$9,708,663

Share of Total Adjusted Gross Income

20.58%

35.96%

47.21%

68.91%

88.73%

11.27%

100.00%

Income Taxes Paid ($ millions)

$542,640

$824,153

$974,124

$1,192,679

$1,336,637

$37,740

$1,374,379

Share of Total Income Taxes Paid

39.48%

59.97%

70.88%

86.78%

97.25%

2.75%

100.00%

Income Split Point

$465,626

$188,996

$133,445

$77,714

$38,173

Average Tax Rate

27.16%

23.61%

21.25%

17.83%

15.52%

3.45%

14.16%

Note: Does not include dependent filers

High-Income Americans Paid the Majority of Federal Taxes

In 2014, the bottom 50 percent of taxpayers (those with AGIs below $38,173) earned 11.27 percent of total AGI. This group of taxpayers paid approximately $38 billion in taxes, or 2.75 percent of all income taxes in 2014.

In contrast, the top 1 percent of all taxpayers (taxpayers with AGIs of $465,626 and above) earned 20.58 percent of all AGI in 2014, but paid 39.48 percent of all federal income taxes.

In 2014, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid $543 billion, or 39.48 percent of all income taxes, while the bottom 90 percent paid $400 billion, or 29.12 percent of all income taxes.

Figure 1.

High-Income Taxpayers Pay the Highest Average Tax Rates

The 2014 IRS data shows that taxpayers with higher incomes pay much higher average individual income tax rates than lower-income taxpayers.[4]

The bottom 50 percent of taxpayers (taxpayers with AGIs below $38,173) faced an average income tax rate of 3.45 percent. As household income increases, the IRS data shows that average income tax rates rise. For example, taxpayers with AGIs between the 10th and 5th percentile ($133,445 and $188,996) pay an average rate of 13.7 percent – almost four times the rate paid by those in the bottom 50 percent.

The top 1 percent of taxpayers (AGI of $465,626 and above) paid the highest effective income tax rate, at 27.2 percent, 7.9 times the rate faced by the bottom 50 percent of taxpayers.

Figure 2.

Taxpayers at the very top of the income distribution, the top 0.1 percent (with AGIs over $2.14 million), paid an even higher average tax rate, of 27.7 percent.

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

106,155

1,062

5,308

5,308

10,615

15,923

26,539

26,539

53,077

53,077

1988

108,873

1,089

5,444

5,444

10,887

16,331

27,218

27,218

54,436

54,436

1989

111,313

1,113

5,566

5,566

11,131

16,697

27,828

27,828

55,656

55,656

1990

112,812

1,128

5,641

5,641

11,281

16,922

28,203

28,203

56,406

56,406

1991

113,804

1,138

5,690

5,690

11,380

17,071

28,451

28,451

56,902

56,902

1992

112,653

1,127

5,633

5,633

11,265

16,898

28,163

28,163

56,326

56,326

1993

113,681

1,137

5,684

5,684

11,368

17,052

28,420

28,420

56,841

56,841

1994

114,990

1,150

5,749

5,749

11,499

17,248

28,747

28,747

57,495

57,495

1995

117,274

1,173

5,864

5,864

11,727

17,591

29,319

29,319

58,637

58,637

1996

119,442

1,194

5,972

5,972

11,944

17,916

29,860

29,860

59,721

59,721

1997

121,503

1,215

6,075

6,075

12,150

18,225

30,376

30,376

60,752

60,752

1998

123,776

1,238

6,189

6,189

12,378

18,566

30,944

30,944

61,888

61,888

1999

126,009

1,260

6,300

6,300

12,601

18,901

31,502

31,502

63,004

63,004

2000

128,227

1,282

6,411

6,411

12,823

19,234

32,057

32,057

64,114

64,114

The IRS changed methodology, so data above and below this line not strictly comparable

2001

119,371

119

1,194

5,969

5,969

11,937

17,906

29,843

29,843

59,685

59,685

2002

119,851

120

1,199

5,993

5,993

11,985

17,978

29,963

29,963

59,925

59,925

2003

120,759

121

1,208

6,038

6,038

12,076

18,114

30,190

30,190

60,379

60,379

2004

122,510

123

1,225

6,125

6,125

12,251

18,376

30,627

30,627

61,255

61,255

2005

124,673

125

1,247

6,234

6,234

12,467

18,701

31,168

31,168

62,337

62,337

2006

128,441

128

1,284

6,422

6,422

12,844

19,266

32,110

32,110

64,221

64,221

2007

132,655

133

1,327

6,633

6,633

13,265

19,898

33,164

33,164

66,327

66,327

2008

132,892

133

1,329

6,645

6,645

13,289

19,934

33,223

33,223

66,446

66,446

2009

132,620

133

1,326

6,631

6,631

13,262

19,893

33,155

33,155

66,310

66,310

2010

135,033

135

1,350

6,752

6,752

13,503

20,255

33,758

33,758

67,517

67,517

2011

136,586

137

1,366

6,829

6,829

13,659

20,488

34,146

34,146

68,293

68,293

2012

136,080

136

1,361

6,804

6,804

13,608

20,412

34,020

34,020

68,040

68,040

2013

138,313

138

1,383

6,916

6,916

13,831

20,747

34,578

34,578

69,157

69,157

2014

139,562

140

1,396

6,978

6,978

13,956

20,934

34,891

34,891

69,781

69,781

Year

Total

Top 0.1%

Top 1%

Top 5%

Between 5% & 10%

Top 10%

Between 10% & 25%

Top 25%

Between 25% & 50%

Top 50%

Bottom 50%

Table 3. Adjusted Gross Income of Taxpayers in Various Income Brackets, 1980–2014 ($Billions)

Source: Internal Revenue Service.

1980

$1,627

$138

$342

$181

$523

$400

$922

$417

$1,339

$288

1981

$1,791

$149

$372

$201

$573

$442

$1,015

$458

$1,473

$318

1982

$1,876

$167

$398

$207

$605

$460

$1,065

$478

$1,544

$332

1983

$1,970

$183

$428

$217

$646

$481

$1,127

$498

$1,625

$344

1984

$2,173

$210

$482

$240

$723

$528

$1,251

$543

$1,794

$379

1985

$2,344

$235

$531

$260

$791

$567

$1,359

$580

$1,939

$405

1986

$2,524

$285

$608

$278

$887

$604

$1,490

$613

$2,104

$421

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

$2,814

$347

$722

$316

$1,038

$671

$1,709

$664

$2,374

$440

1988

$3,124

$474

$891

$342

$1,233

$718

$1,951

$707

$2,658

$466

1989

$3,299

$468

$918

$368

$1,287

$768

$2,054

$751

$2,805

$494

1990

$3,451

$483

$953

$385

$1,338

$806

$2,144

$788

$2,933

$519

1991

$3,516

$457

$943

$400

$1,343

$832

$2,175

$809

$2,984

$532

1992

$3,681

$524

$1,031

$413

$1,444

$856

$2,299

$832

$3,131

$549

1993

$3,776

$521

$1,048

$426

$1,474

$883

$2,358

$854

$3,212

$563

1994

$3,961

$547

$1,103

$449

$1,552

$929

$2,481

$890

$3,371

$590

1995

$4,245

$620

$1,223

$482

$1,705

$985

$2,690

$938

$3,628

$617

1996

$4,591

$737

$1,394

$515

$1,909

$1,043

$2,953

$992

$3,944

$646

1997

$5,023

$873

$1,597

$554

$2,151

$1,116

$3,268

$1,060

$4,328

$695

1998

$5,469

$1,010

$1,797

$597

$2,394

$1,196

$3,590

$1,132

$4,721

$748

1999

$5,909

$1,153

$2,012

$641

$2,653

$1,274

$3,927

$1,199

$5,126

$783

2000

$6,424

$1,337

$2,267

$688

$2,955

$1,358

$4,314

$1,276

$5,590

$834

The IRS changed methodology, so data above and below this line not strictly comparable

2001

$6,116

$492

$1,065

$1,934

$666

$2,600

$1,334

$3,933

$1,302

$5,235

$881

2002

$5,982

$421

$960

$1,812

$660

$2,472

$1,339

$3,812

$1,303

$5,115

$867

2003

$6,157

$466

$1,030

$1,908

$679

$2,587

$1,375

$3,962

$1,325

$5,287

$870

2004

$6,735

$615

$1,279

$2,243

$725

$2,968

$1,455

$4,423

$1,403

$5,826

$908

2005

$7,366

$784

$1,561

$2,623

$778

$3,401

$1,540

$4,940

$1,473

$6,413

$953

2006

$7,970

$895

$1,761

$2,918

$841

$3,760

$1,652

$5,412

$1,568

$6,980

$990

2007

$8,622

$1,030

$1,971

$3,223

$905

$4,128

$1,770

$5,898

$1,673

$7,571

$1,051

2008

$8,206

$826

$1,657

$2,868

$905

$3,773

$1,782

$5,555

$1,673

$7,228

$978

2009

$7,579

$602

$1,305

$2,439

$878

$3,317

$1,740

$5,058

$1,620

$6,678

$900

2010

$8,040

$743

$1,517

$2,716

$915

$3,631

$1,800

$5,431

$1,665

$7,096

$944

2011

$8,317

$737

$1,556

$2,819

$956

$3,775

$1,866

$5,641

$1,716

$7,357

$961

2012

$9,042

$1,017

$1,977

$3,331

$997

$4,328

$1,934

$6,262

$1,776

$8,038

$1,004

2013

$9,034

$816

$1,720

$3,109

$1,034

$4,143

$2,008

$6,152

$1,844

$7,996

$1,038

2014

$9,709

$986

$1,998

$3,491

$1,093

$4,583

$2,107

$6,690

$1,924

$8,615

$1,094

Year

Total

Top 0.1%

Top 1%

Top 5%

Between 5% & 10%

Top 10%

Between 10% & 25%

Top 25%

Between 25% & 50%

Top 50%

Bottom 50%

Table 4. Total Income Tax after Credits, 1980–2014 ($Billions)

Source: Internal Revenue Service.

1980

$249

$47

$92

$31

$123

$59

$182

$50

$232

$18

1981

$282

$50

$99

$36

$135

$69

$204

$57

$261

$21

1982

$276

$53

$100

$34

$134

$66

$200

$56

$256

$20

1983

$272

$55

$101

$34

$135

$64

$199

$54

$252

$19

1984

$297

$63

$113

$37

$150

$68

$219

$57

$276

$22

1985

$322

$70

$125

$41

$166

$73

$238

$60

$299

$23

1986

$367

$94

$156

$44

$201

$78

$279

$64

$343

$24

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

$369

$92

$160

$46

$205

$79

$284

$63

$347

$22

1988

$413

$114

$188

$48

$236

$85

$321

$68

$389

$24

1989

$433

$109

$190

$51

$241

$93

$334

$73

$408

$25

1990

$447

$112

$195

$52

$248

$97

$344

$77

$421

$26

1991

$448

$111

$194

$56

$250

$96

$347

$77

$424

$25

1992

$476

$131

$218

$58

$276

$97

$374

$78

$452

$24

1993

$503

$146

$238

$60

$298

$101

$399

$80

$479

$24

1994

$535

$154

$254

$64

$318

$108

$425

$84

$509

$25

1995

$588

$178

$288

$70

$357

$115

$473

$88

$561

$27

1996

$658

$213

$335

$76

$411

$124

$535

$95

$630

$28

1997

$727

$241

$377

$82

$460

$134

$594

$102

$696

$31

1998

$788

$274

$425

$88

$513

$139

$652

$103

$755

$33

1999

$877

$317

$486

$97

$583

$150

$733

$109

$842

$35

2000

$981

$367

$554

$106

$660

$164

$824

$118

$942

$38

The IRS changed methodology, so data above and below this line not strictly comparable

2001

$885

$139

$294

$462

$101

$564

$158

$722

$120

$842

$43

2002

$794

$120

$263

$420

$93

$513

$143

$657

$104

$761

$33

2003

$746

$115

$251

$399

$85

$484

$133

$617

$98

$715

$30

2004

$829

$142

$301

$467

$91

$558

$137

$695

$102

$797

$32

2005

$932

$176

$361

$549

$98

$647

$145

$793

$106

$898

$33

2006

$1,020

$196

$402

$607

$108

$715

$157

$872

$113

$986

$35

2007

$1,112

$221

$443

$666

$117

$783

$170

$953

$122

$1,075

$37

2008

$1,029

$187

$386

$597

$115

$712

$168

$880

$117

$997

$32

2009

$863

$146

$314

$502

$101

$604

$146

$749

$93

$842

$21

2010

$949

$170

$355

$561

$110

$670

$156

$827

$100

$927

$22

2011

$1,043

$168

$366

$589

$123

$712

$181

$893

$120

$1,012

$30

2012

$1,185

$220

$451

$699

$133

$831

$193

$1,024

$128

$1,152

$33

2013

$1,232

$228

$466

$721

$139

$860

$203

$1,063

$135

$1,198

$34

2014

$1,374

$273

$543

$824

$150

$974

$219

$1,193

$144

$1,337

$38

Year

Total

Top 0.1%

Top 1%

Top 5%

Between 5% & 10%

Top 10%

Between 10% & 25%

Top 25%

Between 25% & 50%

Top 50%

Bottom 50%

Table 5. Adjusted Gross Income Shares, 1980–2014 (percent of total AGI earned by each group)

Source: Internal Revenue Service.

1980

100%

8.46%

21.01%

11.12%

32.13%

24.57%

56.70%

25.62%

82.32%

17.68%

1981

100%

8.30%

20.78%

11.20%

31.98%

24.69%

56.67%

25.59%

82.25%

17.75%

1982

100%

8.91%

21.23%

11.03%

32.26%

24.53%

56.79%

25.50%

82.29%

17.71%

1983

100%

9.29%

21.74%

11.04%

32.78%

24.44%

57.22%

25.30%

82.52%

17.48%

1984

100%

9.66%

22.19%

11.06%

33.25%

24.31%

57.56%

25.00%

82.56%

17.44%

1985

100%

10.03%

22.67%

11.10%

33.77%

24.21%

57.97%

24.77%

82.74%

17.26%

1986

100%

11.30%

24.11%

11.02%

35.12%

23.92%

59.04%

24.30%

83.34%

16.66%

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

100%

12.32%

25.67%

11.23%

36.90%

23.85%

60.75%

23.62%

84.37%

15.63%

1988

100%

15.16%

28.51%

10.94%

39.45%

22.99%

62.44%

22.63%

85.07%

14.93%

1989

100%

14.19%

27.84%

11.16%

39.00%

23.28%

62.28%

22.76%

85.04%

14.96%

1990

100%

14.00%

27.62%

11.15%

38.77%

23.36%

62.13%

22.84%

84.97%

15.03%

1991

100%

12.99%

26.83%

11.37%

38.20%

23.65%

61.85%

23.01%

84.87%

15.13%

1992

100%

14.23%

28.01%

11.21%

39.23%

23.25%

62.47%

22.61%

85.08%

14.92%

1993

100%

13.79%

27.76%

11.29%

39.05%

23.40%

62.45%

22.63%

85.08%

14.92%

1994

100%

13.80%

27.85%

11.34%

39.19%

23.45%

62.64%

22.48%

85.11%

14.89%

1995

100%

14.60%

28.81%

11.35%

40.16%

23.21%

63.37%

22.09%

85.46%

14.54%

1996

100%

16.04%

30.36%

11.23%

41.59%

22.73%

64.32%

21.60%

85.92%

14.08%

1997

100%

17.38%

31.79%

11.03%

42.83%

22.22%

65.05%

21.11%

86.16%

13.84%

1998

100%

18.47%

32.85%

10.92%

43.77%

21.87%

65.63%

20.69%

86.33%

13.67%

1999

100%

19.51%

34.04%

10.85%

44.89%

21.57%

66.46%

20.29%

86.75%

13.25%

2000

100%

20.81%

35.30%

10.71%

46.01%

21.15%

67.15%

19.86%

87.01%

12.99%

The IRS changed methodology, so data above and below this line not strictly comparable

2001

100%

8.05%

17.41%

31.61%

10.89%

42.50%

21.80%

64.31%

21.29%

85.60%

14.40%

2002

100%

7.04%

16.05%

30.29%

11.04%

41.33%

22.39%

63.71%

21.79%

85.50%

14.50%

2003

100%

7.56%

16.73%

30.99%

11.03%

42.01%

22.33%

64.34%

21.52%

85.87%

14.13%

2004

100%

9.14%

18.99%

33.31%

10.77%

44.07%

21.60%

65.68%

20.83%

86.51%

13.49%

2005

100%

10.64%

21.19%

35.61%

10.56%

46.17%

20.90%

67.07%

19.99%

87.06%

12.94%

2006

100%

11.23%

22.10%

36.62%

10.56%

47.17%

20.73%

67.91%

19.68%

87.58%

12.42%

2007

100%

11.95%

22.86%

37.39%

10.49%

47.88%

20.53%

68.41%

19.40%

87.81%

12.19%

2008

100%

10.06%

20.19%

34.95%

11.03%

45.98%

21.71%

67.69%

20.39%

88.08%

11.92%

2009

100%

7.94%

17.21%

32.18%

11.59%

43.77%

22.96%

66.74%

21.38%

88.12%

11.88%

2010

100%

9.24%

18.87%

33.78%

11.38%

45.17%

22.38%

67.55%

20.71%

88.26%

11.74%

2011

100%

8.86%

18.70%

33.89%

11.50%

45.39%

22.43%

67.82%

20.63%

88.45%

11.55%

2012

100%

11.25%

21.86%

36.84%

11.03%

47.87%

21.39%

69.25%

19.64%

88.90%

11.10%

2013

100%

9.03%

19.04%

34.42%

11.45%

45.87%

22.23%

68.10%

20.41%

88.51%

11.49%

2014

100%

10.16%

20.58%

35.96%

11.25%

47.21%

21.70%

68.91%

19.82%

88.73%

11.27%

Year

Total

Top 0.1%

Top 1%

Top 5%

Between 5% & 10%

Top 10%

Between 10% & 25%

Top 25%

Between 25% & 50%

Top 50%

Bottom 50%

Table 6. Total Income Tax Shares, 1980–2014 (percent of federal income tax paid by each group)

Source: Internal Revenue Service.

1980

100%

19.05%

36.84%

12.44%

49.28%

23.74%

73.02%

19.93%

92.95%

7.05%

1981

100%

17.58%

35.06%

12.90%

47.96%

24.33%

72.29%

20.26%

92.55%

7.45%

1982

100%

19.03%

36.13%

12.45%

48.59%

23.91%

72.50%

20.15%

92.65%

7.35%

1983

100%

20.32%

37.26%

12.44%

49.71%

23.39%

73.10%

19.73%

92.83%

7.17%

1984

100%

21.12%

37.98%

12.58%

50.56%

22.92%

73.49%

19.16%

92.65%

7.35%

1985

100%

21.81%

38.78%

12.67%

51.46%

22.60%

74.06%

18.77%

92.83%

7.17%

1986

100%

25.75%

42.57%

12.12%

54.69%

21.33%

76.02%

17.52%

93.54%

6.46%

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

100%

24.81%

43.26%

12.35%

55.61%

21.31%

76.92%

17.02%

93.93%

6.07%

1988

100%

27.58%

45.62%

11.66%

57.28%

20.57%

77.84%

16.44%

94.28%

5.72%

1989

100%

25.24%

43.94%

11.85%

55.78%

21.44%

77.22%

16.94%

94.17%

5.83%

1990

100%

25.13%

43.64%

11.73%

55.36%

21.66%

77.02%

17.16%

94.19%

5.81%

1991

100%

24.82%

43.38%

12.45%

55.82%

21.46%

77.29%

17.23%

94.52%

5.48%

1992

100%

27.54%

45.88%

12.12%

58.01%

20.47%

78.48%

16.46%

94.94%

5.06%

1993

100%

29.01%

47.36%

11.88%

59.24%

20.03%

79.27%

15.92%

95.19%

4.81%

1994

100%

28.86%

47.52%

11.93%

59.45%

20.10%

79.55%

15.68%

95.23%

4.77%

1995

100%

30.26%

48.91%

11.84%

60.75%

19.62%

80.36%

15.03%

95.39%

4.61%

1996

100%

32.31%

50.97%

11.54%

62.51%

18.80%

81.32%

14.36%

95.68%

4.32%

1997

100%

33.17%

51.87%

11.33%

63.20%

18.47%

81.67%

14.05%

95.72%

4.28%

1998

100%

34.75%

53.84%

11.20%

65.04%

17.65%

82.69%

13.10%

95.79%

4.21%

1999

100%

36.18%

55.45%

11.00%

66.45%

17.09%

83.54%

12.46%

96.00%

4.00%

2000

100%

37.42%

56.47%

10.86%

67.33%

16.68%

84.01%

12.08%

96.09%

3.91%

The IRS changed methodology, so data above and below this line not strictly comparable

2001

100%

15.68%

33.22%

52.24%

11.44%

63.68%

17.88%

81.56%

13.54%

95.10%

4.90%

2002

100%

15.09%

33.09%

52.86%

11.77%

64.63%

18.04%

82.67%

13.12%

95.79%

4.21%

2003

100%

15.37%

33.69%

53.54%

11.35%

64.89%

17.87%

82.76%

13.17%

95.93%

4.07%

2004

100%

17.12%

36.28%

56.35%

10.96%

67.30%

16.52%

83.82%

12.31%

96.13%

3.87%

2005

100%

18.91%

38.78%

58.93%

10.52%

69.46%

15.61%

85.07%

11.35%

96.41%

3.59%

2006

100%

19.24%

39.36%

59.49%

10.59%

70.08%

15.41%

85.49%

11.10%

96.59%

3.41%

2007

100%

19.84%

39.81%

59.90%

10.51%

70.41%

15.30%

85.71%

10.93%

96.64%

3.36%

2008

100%

18.20%

37.51%

58.06%

11.14%

69.20%

16.37%

85.57%

11.33%

96.90%

3.10%

2009

100%

16.91%

36.34%

58.17%

11.72%

69.89%

16.85%

86.74%

10.80%

97.54%

2.46%

2010

100%

17.88%

37.38%

59.07%

11.55%

70.62%

16.49%

87.11%

10.53%

97.64%

2.36%

2011

100%

16.14%

35.06%

56.49%

11.77%

68.26%

17.36%

85.62%

11.50%

97.11%

2.89%

2012

100%

18.60%

38.09%

58.95%

11.22%

70.17%

16.25%

86.42%

10.80%

97.22%

2.78%

2013

100%

18.48%

37.80%

58.55%

11.25%

69.80%

16.47%

86.27%

10.94%

97.22%

2.78%

2014

100%

19.85%

39.48%

59.97%

10.91%

70.88%

15.90%

86.78%

10.47%

97.25%

2.75%

Year

Total

Top 1%

Top 5%

Top 10%

Top 25%

Top 50%

Table 7. Dollar Cut-Off, 1980–2014 (Minimum AGI for Tax Returns to Fall into Various Percentiles; Thresholds Not Adjusted for Inflation)

1980

$80,580

$43,792

$35,070

$23,606

$12,936

1981

$85,428

$47,845

$38,283

$25,655

$14,000

1982

$89,388

$49,284

$39,676

$27,027

$14,539

1983

$93,512

$51,553

$41,222

$27,827

$15,044

1984

$100,889

$55,423

$43,956

$29,360

$15,998

1985

$108,134

$58,883

$46,322

$30,928

$16,688

1986

$118,818

$62,377

$48,656

$32,242

$17,302

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

$139,289

$68,414

$52,921

$33,983

$17,768

1988

$157,136

$72,735

$55,437

$35,398

$18,367

1989

$163,869

$76,933

$58,263

$36,839

$18,993

1990

$167,421

$79,064

$60,287

$38,080

$19,767

1991

$170,139

$81,720

$61,944

$38,929

$20,097

1992

$181,904

$85,103

$64,457

$40,378

$20,803

1993

$185,715

$87,386

$66,077

$41,210

$21,179

1994

$195,726

$91,226

$68,753

$42,742

$21,802

1995

$209,406

$96,221

$72,094

$44,207

$22,344

1996

$227,546

$101,141

$74,986

$45,757

$23,174

1997

$250,736

$108,048

$79,212

$48,173

$24,393

1998

$269,496

$114,729

$83,220

$50,607

$25,491

1999

$293,415

$120,846

$87,682

$52,965

$26,415

2000

$313,469

$128,336

$92,144

$55,225

$27,682

The IRS changed methodology, so data above and below this line not strictly comparable

2001

$1,393,718

$306,635

$132,082

$96,151

$59,026

$31,418

2002

$1,245,352

$296,194

$130,750

$95,699

$59,066

$31,299

2003

$1,317,088

$305,939

$133,741

$97,470

$59,896

$31,447

2004

$1,617,918

$339,993

$140,758

$101,838

$62,794

$32,622

2005

$1,938,175

$379,261

$149,216

$106,864

$64,821

$33,484

2006

$2,124,625

$402,603

$157,390

$112,016

$67,291

$34,417

2007

$2,251,017

$426,439

$164,883

$116,396

$69,559

$35,541

2008

$1,867,652

$392,513

$163,512

$116,813

$69,813

$35,340

2009

$1,469,393

$351,968

$157,342

$114,181

$68,216

$34,156

2010

$1,634,386

$369,691

$161,579

$116,623

$69,126

$34,338

2011

$1,717,675

$388,905

$167,728

$120,136

$70,492

$34,823

2012

$2,161,175

$434,682

$175,817

$125,195

$73,354

$36,055

2013

$1,860,848

$428,713

$179,760

$127,695

$74,955

$36,841

2014

$2,136,762

$465,626

$188,996

$133,445

$77,714

$38,173

Source: Internal Revenue Service.

Year

Total

Top 0.1%

Top 1%

Top 5%

Between 5% & 10%

Top 10%

Between 10% & 25%

Top 25%

Between 25% & 50%

Top 50%

Bottom 50%

Table 8. Average Tax Rate, 1980–2014 (Percent of AGI Paid in Income Taxes)

Source: Internal Revenue Service.

1980

15.31%

34.47%

26.85%

17.13%

23.49%

14.80%

19.72%

11.91%

17.29%

6.10%

1981

15.76%

33.37%

26.59%

18.16%

23.64%

15.53%

20.11%

12.48%

17.73%

6.62%

1982

14.72%

31.43%

25.05%

16.61%

22.17%

14.35%

18.79%

11.63%

16.57%

6.10%

1983

13.79%

30.18%

23.64%

15.54%

20.91%

13.20%

17.62%

10.76%

15.52%

5.66%

1984

13.68%

29.92%

23.42%

15.57%

20.81%

12.90%

17.47%

10.48%

15.35%

5.77%

1985

13.73%

29.86%

23.50%

15.69%

20.93%

12.83%

17.55%

10.41%

15.41%

5.70%

1986

14.54%

33.13%

25.68%

15.99%

22.64%

12.97%

18.72%

10.48%

16.32%

5.63%

The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line not strictly comparable

1987

13.12%

26.41%

22.10%

14.43%

19.77%

11.71%

16.61%

9.45%

14.60%

5.09%

1988

13.21%

24.04%

21.14%

14.07%

19.18%

11.82%

16.47%

9.60%

14.64%

5.06%

1989

13.12%

23.34%

20.71%

13.93%

18.77%

12.08%

16.27%

9.77%

14.53%

5.11%

1990

12.95%

23.25%

20.46%

13.63%

18.50%

12.01%

16.06%

9.73%

14.36%

5.01%

1991

12.75%

24.37%

20.62%

13.96%

18.63%

11.57%

15.93%

9.55%

14.20%

4.62%

1992

12.94%

25.05%

21.19%

13.99%

19.13%

11.39%

16.25%

9.42%

14.44%

4.39%

1993

13.32%

28.01%

22.71%

14.01%

20.20%

11.40%

16.90%

9.37%

14.90%

4.29%

1994

13.50%

28.23%

23.04%

14.20%

20.48%

11.57%

17.15%

9.42%

15.11%

4.32%

1995

13.86%

28.73%

23.53%

14.46%

20.97%

11.71%

17.58%

9.43%

15.47%

4.39%

1996

14.34%

28.87%

24.07%

14.74%

21.55%

11.86%

18.12%

9.53%

15.96%

4.40%

1997

14.48%

27.64%

23.62%

14.87%

21.36%

12.04%

18.18%

9.63%

16.09%

4.48%

1998

14.42%

27.12%

23.63%

14.79%

21.42%

11.63%

18.16%

9.12%

16.00%

4.44%

1999

14.85%

27.53%

24.18%

15.06%

21.98%

11.76%

18.66%

9.12%

16.43%

4.48%

2000

15.26%

27.45%

24.42%

15.48%

22.34%

12.04%

19.09%

9.28%

16.86%

4.60%

The IRS changed methodology, so data above and below this line not strictly comparable

2001

14.47%

28.17%

27.60%

23.91%

15.20%

21.68%

11.87%

18.35%

9.20%

16.08%

4.92%

2002

13.28%

28.48%

27.37%

23.17%

14.15%

20.76%

10.70%

17.23%

8.00%

14.87%

3.86%

2003

12.11%

24.60%

24.38%

20.92%

12.46%

18.70%

9.69%

15.57%

7.41%

13.53%

3.49%

2004

12.31%

23.06%

23.52%

20.83%

12.53%

18.80%

9.41%

15.71%

7.27%

13.68%

3.53%

2005

12.65%

22.48%

23.15%

20.93%

12.61%

19.03%

9.45%

16.04%

7.18%

14.01%

3.51%

2006

12.80%

21.94%

22.80%

20.80%

12.84%

19.02%

9.52%

16.12%

7.22%

14.12%

3.51%

2007

12.90%

21.42%

22.46%

20.66%

12.92%

18.96%

9.61%

16.16%

7.27%

14.19%

3.56%

2008

12.54%

22.67%

23.29%

20.83%

12.66%

18.87%

9.45%

15.85%

6.97%

13.79%

3.26%

2009

11.39%

24.28%

24.05%

20.59%

11.53%

18.19%

8.36%

14.81%

5.76%

12.61%

2.35%

2010

11.81%

22.84%

23.39%

20.64%

11.98%

18.46%

8.70%

15.22%

6.01%

13.06%

2.37%

2011

12.54%

22.82%

23.50%

20.89%

12.83%

18.85%

9.70%

15.82%

6.98%

13.76%

3.13%

2012

13.11%

21.67%

22.83%

20.97%

13.33%

19.21%

9.96%

16.35%

7.21%

14.33%

3.28%

2013

13.64%

27.91%

27.08%

23.20%

13.40%

20.75%

10.11%

17.28%

7.31%

14.98%

3.30%

2014

14.16%

27.67%

27.16%

23.61%

13.73%

21.25%

10.37%

17.83%

7.48%

15.52%

3.45%

For data prior to 2001, all tax returns that have a positive AGI are included, even those that do not have a positive income tax liability. For data from 2001 forward, returns with negative AGI are also included, but dependent returns are excluded.

Income tax after credits (the measure of “income taxes paid” above) does not account for the refundable portion of EITC. If it were included, the tax share of the top income groups would be higher. The refundable portion is classified as a spending program by the Office of Management and Budget and therefore is not included by the IRS in these figures.

The only tax analyzed here is the federal individual income tax, which is responsible for more than 25 percent of the nation’s taxes paid (at all levels of government). Federal income taxes are much more progressive than federal payroll taxes, which are responsible for about 20 percent of all taxes paid (at all levels of government), and are more progressive than most state and local taxes.

AGI is a fairly narrow income concept and does not include income items like government transfers (except for the portion of Social Security benefits that is taxed), the value of employer-provided health insurance, underreported or unreported income (most notably that of sole proprietors), income derived from municipal bond interest, net imputed rental income, and others.

The unit of analysis here is that of the tax return. In the figures prior to 2001, some dependent returns are included. Under other units of analysis (like the Treasury Department’s Family Economic Unit), these returns would likely be paired with parents’ returns.

These figures represent the legal incidence of the income tax. Most distributional tables (such as those from CBO, Tax Policy Center, Citizens for Tax Justice, the Treasury Department, and JCT) assume that the entire economic incidence of personal income taxes falls on the income earner.

[3] There is strong reason to believe that capital gains realizations were unusually depressed in 2013, due to the increase in the top capital gains tax rate from 15 percent to 23.8 percent. In 2013, capital gains accounted for 26.6 percent of the income of taxpayers with over $1 million in AGI received, compared to 31.7 percent in 2014 (these calculations apply for net capital gains reported on Schedule D). Table 1.4, Publication 1304, “Individual Income Tax Returns 2014,” Internal Revenue Service, https://www.irs.gov/uac/soi-tax-stats-individual-income-tax-returns-publication-1304-complete-report.

Tyler Cowen: The Rise and Fall of the Chinese Economy

The Great Stagnation by Tyler Cowen

Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the fourth quarter of
2016 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In the
third quarter of 2016, real GDP increased 3.5 percent.
The GDP estimate released today is based on more complete source data than were available for the
"second" estimate issued last month. In the second estimate, the increase in real GDP was 1.9 percent.
With this third estimate for the fourth quarter, the general picture of economic growth remains largely
the same; personal consumption expenditures (PCE) increased more than previously estimated (see
"Updates to GDP" on page 2).

Real gross domestic income (GDI) increased 1.0 percent in the fourth quarter, compared with an
increase of 5.0 percent in the third. The average of real GDP and real GDI, a supplemental measure of
U.S. economic activity that equally weights GDP and GDI, increased 1.5 percent in the fourth quarter,
compared with an increase of 4.3 percent in the third quarter (table 1).
The increase in real GDP in the fourth quarter reflected positive contributions from PCE, private
inventory investment, residential fixed investment, nonresidential fixed investment, and state and local
government spending that were partly offset by negative contributions from exports and federal
government spending. Imports, which are a subtraction in the calculation of GDP, increased (table 2).
The deceleration in real GDP in the fourth quarter reflected downturns in exports and in federal
government spending, an acceleration in imports, and a deceleration in nonresidential fixed investment
that were partly offset by accelerations in private inventory investment and in PCE, and upturns in
residential fixed investment and in state and local government spending.
Current-dollar GDP increased 4.2 percent, or $194.1 billion, in the fourth quarter to a level of $18,869.4
billion. In the third quarter, current-dollar GDP increased 5.0 percent, or $225.2 billion (table 1 and
table 3).
The price index for gross domestic purchases increased 2.0 percent in the fourth quarter, compared
with an increase of 1.5 percent in the third quarter (table 4). The PCE price index increased 2.0 percent,
compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index
increased 1.3 percent, compared with an increase of 1.7 percent (appendix table A).
Updates to GDP
The upward revision to the percent change in real GDP primarily reflected upward revisions to PCE and
to private inventory investment that were partly offset by downward revisions to nonresidential fixed
investment and to exports. Imports, which are a subtraction in the calculation of GDP, were revised
upward. For more information, see the Technical Note. For information on updates to GDP, see the
"Additional Information" section that follows.
Advance Estimate Second Estimate Third Estimate
(Percent change from preceding quarter)
Real GDP 1.9 1.9 2.1
Current-dollar GDP 4.0 3.9 4.2
Real GDI --- --- 1.0
Average of Real GDP and Real GDI --- --- 1.5
Gross domestic purchases price index 2.0 1.9 2.0
PCE price index 2.2 1.9 2.0
2016 GDP
Real GDP increased 1.6 percent in 2016 (that is, from the 2015 annual level to the 2016 annual level),
compared with an increase of 2.6 percent in 2015 (table 1).
The increase in real GDP in 2016 reflected positive contributions from PCE, residential fixed investment,
state and local government spending, exports, and federal government spending that were partly offset
by negative contributions from private inventory investment and nonresidential fixed investment.
Imports, which are a subtraction in the calculation of GDP, increased (table 2).
The deceleration in real GDP from 2015 to 2016 reflected downturns in private inventory investment
and in nonresidential fixed investment and decelerations in PCE, in residential fixed investment, and in
state and local government spending that were partly offset by a deceleration in imports and
accelerations in federal government spending and in exports.
Current-dollar GDP increased 3.0 percent, or $532.5 billion, in 2016 to a level of $18,569.1 billion,
compared with an increase of 3.7 percent, or $643.5 billion, in 2015 (table 1 and table 3).
Real GDI increased 1.6 percent in 2016, compared with an increase of 2.5 percent in 2015 (table 1).
The price index for gross domestic purchases increased 1.0 percent in 2016, compared with an increase
of 0.4 percent in 2015 (table 4).
During 2016 (that is, measured from the fourth quarter of 2015 to the fourth quarter of 2016), real GDP
increased 2.0 percent, compared with an increase of 1.9 percent during 2015. The price index for gross
domestic purchases increased 1.5 percent during 2016, compared with an increase of 0.4 percent during
2015. Real GDI increased 1.9 percent during 2016, compared with an increase of 1.5 percent during
2015 (table 7).
Corporate Profits (table 12)
Profits from current production (corporate profits with inventory valuation adjustment and capital
consumption adjustment) increased $11.2 billion in the fourth quarter of 2016, compared with an
increase of $117.8 billion in the third quarter.
Profits of domestic financial corporations increased $26.5 billion in the fourth quarter, compared with
an increase of $50.1 billion in the third. Profits of domestic nonfinancial corporations decreased $60.4
billion, in contrast to an increase of $66.4 billion. The estimate of nonfinancial corporate profits in the
fourth quarter was reduced by a $4.95 billion ($19.8 billion at an annual rate) settlement between a U.S.
subsidiary of Volkswagen and the federal and state governments. For more information, see the FAQ,
"What are the effects of the Volkswagen buyback deal on GDP and the national accounts?”. The
rest-of-the-world component of profits increased $45.1 billion, compared with an increase of $1.3 billion.
This measure is calculated as the difference between receipts from the rest of the world and payments to
the rest of the world. In the fourth quarter, receipts increased $9.1 billion, and payments decreased
$36.0 billion.
In 2016, profits from current production decreased $2.3 billion, compared with a decrease of $64.0
billion in 2015. Profits of domestic financial corporations increased $20.5 billion, compared with an
increase of $8.5 billion. Profits of domestic nonfinancial corporations decreased $47.0 billion, compared
with a decrease of $47.3 billion. The rest-of-the-world component of profits increased $24.3 billion, in
contrast to a decrease of $25.2 billion.
* * *
Next release: April 28, 2017 at 8:30 A.M. EDT
Gross Domestic Product: First Quarter 2017 (Advance Estimate)
Additional Information
Resources
Additional Resources available at www.bea.gov:
• Stay informed about BEA developments by reading the BEA blog, signing up for BEA’s email
subscription service, or following BEA on Twitter @BEA_News.
• Historical time series for these estimates can be accessed in BEA’s Interactive Data Application.
• Access BEA data by registering for BEA’s Data Application Programming Interface (API).
• For more on BEA’s statistics, see our monthly online journal, the Survey of Current Business.
• BEA's news release schedule
• NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts
Definitions
Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy
less the value of the goods and services used up in production. GDP is also equal to the sum of personal
consumption expenditures, gross private domestic investment, net exports of goods and services, and
government consumption expenditures and gross investment.
Gross domestic income (GDI) is the sum of incomes earned and costs incurred in the production of GDP.
In national economic accounting, GDP and GDI are conceptually equal. In practice, GDP and GDI differ
because they are constructed using largely independent source data. Real GDI is calculated by deflating
gross domestic income using the GDP price index as the deflator, and is therefore conceptually
equivalent to real GDP.
Current-dollar estimates are valued in the prices of the period when the transactions occurred—that is,
at “market value.” Also referred to as “nominal estimates” or as “current-price estimates.”
Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.
The gross domestic purchases price index measures the prices of final goods and services purchased by
U.S. residents.
The personal consumption expenditure price index measures the prices paid for the goods and services
purchased by, or on the behalf of, “persons.”
Profits from current production, referred to as corporate profits with inventory valuation adjustment
(IVA) and capital consumption adjustment (CCAdj) in the NIPAs, is a measure of the net income of
corporations before deducting income taxes that is consistent with the value of goods and services
measured in GDP. The IVA and CCAdj are adjustments that convert inventory withdrawals and
depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic
measures used in the national income and product accounts.
For more definitions, see the Glossary: National Income and Product Accounts.
Statistical conventions
Annual rates. Quarterly values are expressed at seasonally-adjusted annual rates (SAAR), unless
otherwise specified. Dollar changes are calculated as the difference between these SAAR values. For
detail, see the FAQ “Why does BEA publish estimates at annual rates?”
Percent changes in quarterly series are calculated from unrounded data and are displayed at annual
rates, unless otherwise specified. For details, see the FAQ “How is average annual growth calculated?”
Quantities and prices. Quantities, or “real” volume measures, and prices are expressed as index
numbers with a specified reference year equal to 100 (currently 2009). Quantity and price indexes are
calculated using a Fisher-chained weighted formula that incorporates weights from two adjacent
periods (quarters for quarterly data and annuals for annual data). “Real” dollar series are calculated by
multiplying the published quantity index by the current dollar value in the reference year (2009) and
then dividing by 100. Percent changes calculated from real quantity indexes and chained-dollar levels
are conceptually the same; any differences are due to rounding.
Chained-dollar values are not additive because the relative weights for a given period differ from those
of the reference year. In tables that display chained-dollar values, a “residual” line shows the difference
between the sum of detailed chained-dollar series and its corresponding aggregate.
Updates to GDP
BEA releases three vintages of the current quarterly estimate for GDP: "Advance" estimates are
released near the end of the first month following the end of the quarter and are based on source data
that are incomplete or subject to further revision by the source agency; “second” and “third” estimates
are released near the end of the second and third months, respectively, and are based on more detailed
and more comprehensive data as they become available.
Annual and comprehensive updates are typically released in late July. Annual updates generally cover at
least the 3 most recent calendar years (and their associated quarters) and incorporate newly available
major annual source data as well as some changes in methods and definitions to improve the accounts.
Comprehensive (or benchmark) updates are carried out at about 5-year intervals and incorporate major
periodic source data, as well as major conceptual improvements.
The table below shows the average revisions to the quarterly percent changes in real GDP between
different estimate vintages, without regard to sign.
Vintage Average Revision Without Regard to Sign
(percentage points, annual rates)
Advance to second 0.5
Advance to third 0.6
Second to third 0.2
Advance to latest 1.1
Note - Based on estimates from 1993 through 2015. For more information on GDP updates, see Revision
Information on the BEA Web site.
The larger average revision from the advance to the latest estimate reflects the fact that periodic
comprehensive updates include major statistical and methodological improvements.
Unlike GDP, an advance current quarterly estimate of GDI is not released because data on domestic
profits and on net interest of domestic industries are not available. For fourth quarter estimates, these
data are not available until the third estimate.